The Index of Industrial Production (IIP) for the month of February rose at a slower-than-expected 15.1% as against 16.7% on a month-on-month basis, helped by stimulus measures that boosted domestic demand. The output is expected to ease further following moves to withdraw an economic stimulus, including a interest rate hike in March. A CNBC-TV18 poll indicates a figure of 16.5% for the month.
While the manufacturing sector for grew at 16% in February as compared to 17.9% in January 2010, the mining sector posted a growth at 12.2% versus 14.6% (MoM). The electricity sector too grew at 8.4% in February versus 10.7% in January.
Basic goods for the month grew at 6.7% as compared to 5.6% growth posted in January. The capital goods sector, which showed a growth of 56.2% in January, grew 44.4% in February and the intermediate goods posted 15.6% growth versus 21.3% in January. The consumer goods for the same month grew at 8.9% as against 4.2%.
A pick up in the economy has seen a rise in inflation with the headline number poised to breach 10% in March, above February's 9.89%.
Headline inflation, which was initially driven by high food prices, is now getting a push from other segments. Inflation in manufacturing accelerated to 7.4% in February from 6.5% in January, a sign that inflation is fast becoming a demand-driven problem.
The Reserve Bank of India, citing inflationary pressures and an improving economy, hiked key rates by 25 basis points last month and is expected to raise the rates again by at least the same amount at its policy review on April 20.
Commenting on the figures Atsi Sheth, Chief Economist at Macro-Sutra said, this was still an excellent number. “We stick by our view that the RBI will increase the repo and reverse repo rates by a modest 25 basis points at its policy review on April 20.”
"The number to watch now is inflation, and if it stays in the 10-percent range, especially with non-food inflation not accelerating, this bodes well for our forecast that the RBI's post-April 20 tightening will be measured and moderated," she added.
The numbers are certainly lower than the consensus expectation but some of this was possibly given the core index numbers because there was some slackness on steel, cement and so on, said Abheek Baruah of HDFC Bank. “That has probably got reflected in manufacturing and I think there has been some moderation in both durables and capital goods production, which was again expected because the surge in both December and January have been quite spectacular. So it is just moderation, I wouldn’t be too disappointed but certainly lower than expectations.”
Preferring to use a month-on-month seasonally adjusted numbers rather than year-on-year number, Samiran Chakrabarty, Chief Economist at Standard Chartered Bank says, from that perspective, it’s about 1% MoM drop seasonally adjusted. “However, I am not too surprised because typically we have seen that if in a particular month, the MoM number is very high as happened in January where it was almost a 5% MoM growth, then the next month is somewhat down. So that kind of an adjustment has happen and that’s why this number has come out lower than what the market would have been anticipating. I am not too worried about any reversal of trend in industrial production. I think the momentum is still on.
The yield on the benchmark 10-year bond fell two basis points to 8.03% after the news, but climbed back to 8.04%.
Commenting on the movement, Arun Kaul Executive Director at Central Bank of India, said, “The bond market has seen some worries, the last week auction the yield went up at 7.96 and there on the secondary market the yields have moved upto 8.06% right now. The worry in the market is two-fold; one, inflation has started moving up, we thought inflation was only in primary articles but it looks like non-primary articles it is spilling over too, particularly, the commodity prices are moving up so that is a cause of concern. Particularly oil, oil has moved to USD 86-87 per barrel that is very worrisome. Second, is in terms of the RBI possible action. There is a feeling in the market that the RBI could increase CRR and it could even increase the repo rate to contain inflationary expectations. So that worry is leading to expectation whereby players are not willing to initiate large positions and yields have moved up.”
Finance Minister Pranab Mukherjee has said the government could consider to further roll back stimulus, after hiking factory gate duties in the February budget.
The March purchasing managers' index for India showed the pace of manufacturing activity slowed down, dropping from a 20-month-record in February, as mounting cost pressures took a toll on expansion in output.
India, the world's second fastest growing economy after China, is expected to grow 8.5% in the current fiscal year and 9% in the next.
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