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effect, lower crude oil prices and decreased shocks to food inflation. However, we believe that it will pick up slightly in
the last quarter of this fiscal as the impact from the base effect wears off (Figure 2), inflation expectations rise, impact of
monetary policies rate hikes from last year recede and a pickup in domestic activity restricts a fall in core inflation. We
expect inflation to average at 7.2% in fiscal 2015.
In the medium term, maintaining the 6% retail inflation still remains a challenge, especially when growth begins to pick
up, as supply side inefficiencies need to be addressed in the farm to fork system. Given the inflation dynamics, we expect
RBI to remain on hold for this fiscal despite the recent moderation in Inflation. In addition, in a recent CRISIL Research
report Will a rate cut spur investment? shows that factors behind the recent slowdown in economic growth and
investment in India have little to do with high interest rates. While, the primary reason for the slowdown has been a sharp
fall in the expected return on investments due to policy uncertainty and slowing domestic demand. Thus a rate cut will
yield little return while at the same time increasing the risks of reversing the recent gain in inflation.
Figure 1: Inflation moderates as food inflation edges
down
Headline inflation
17
Food inflation
1.5
Core inflation
15
1.0
13
0.5
11
0.0
%yr
ppt
10
8
6
4
-0.5
Mar-15
Jan-15
Feb-15
Dec-14
Nov-14
Oct-14
Sep-14
Jul-14
Aug-14
Jun-14
0
May-14
-1.5
Apr-14
Oct-14
Aug-14
Jun-14
Apr-14
Feb-14
Dec-13
Oct-13
Aug-13
Jun-13
Apr-13
Feb-13
Dec-12
Oct-12
-1.0
Mar-14
RBI target of 6%
Jan-14
Feb-14
CPI (%y-o-y)
Headline CPI
Food CPI
Cereals & Products
Vegetable & fruits
Milk & Milk products
Fuel & Light
Core CPI
Housing
Clothing, bedding & footwear
Transport and communication
Weight Jan-14 Feb-14 Mar-14 Apr-14 May-14 Jun-14 Jul-14 Aug-14 Sep-14 Oct-14
100.0
8.8
8.0
8.3
8.6
8.3
7.5
8.0
7.7
6.5
5.5
42.7
10.0
8.6
9.2
9.8
9.6
8.0
9.4
9.4
7.6
5.6
14.6
11.3
9.8
9.5
9.5
8.8
7.6
7.5
7.3
6.4
6.0
7.3
20.1
14.8
17.1
18.8
17.3
12.1
18.2
17.1
11.6
2.6
7.7
9.8
10.2
11.0
11.3
11.3
11.1
11.3
11.7
11.0
10.8
9.5
6.5
6.1
6.3
5.9
5.0
4.7
4.5
4.2
3.5
3.3
47.8
8.1
7.9
7.9
8.0
7.8
7.5
7.3
6.9
6.0
5.9
9.8
10.2
9.9
9.9
9.7
9.2
9.1
8.9
8.5
8.1
8.0
4.7
9.1
9.1
9.0
8.7
8.8
8.6
8.7
8.4
7.6
7.4
7.6
7.3
6.4
5.9
6.2
7.0
6.3
5.9
4.7
2.5
2.7
Below 4%
4-6%
2 2
6-8%
8-10% >10%
IIP growth for September came in at 2.5%, higher than 0.5% in August, with the manufacturing output seeing some pickup after two consecutive months of contraction. Towards the end of this month, the Central Statistics Organisation will
release its estimates for GDP growth in Q2. However, IIP data suggests that GDP industry (excluding construction) will
grow far lower at 1.2% in Q2 compared to Q1 growth of 4%, leaving the construction sector to bring an uptick in overall
industrial growth, if any.
Manufacturing output rose by 2.5% in September, with Q2 as a whole posting near stagnation in output. In Q1,
manufacturing growth had risen to 3.9% in part due to the budgetary announcements such as extension of excise
duty cuts in auto, and consumer durables. Consumer goods output fell nearly 2.8% in Q2, with most of the
decline coming from consumer durables. Similarly, capital goods output too fell by 0.1% in Q2 compared to
13.6% growth in Q1.
Moving into Q3, currently there appear limited signs of a pick-up in demand. For instance, the festive month of
October did little to spruce up demand in the automobile sector. On a year-on-year basis, passenger vehicles
sales fell by 7.5% compared to average 7.4% growth in Q2, while two-wheeler sales fell 3.6% in October
compared to average growth of 18.9% in Q2. Commercial vehicle sales however have continued to decline
reflecting sluggishness in industry. The segment saw sales fall 3% in October compared to 3.5% average fall in
Q2.
Growth in electricity generation fell to 3.9% in September after growing at an average 13% in the preceding three
months. This decline could likely be due to a pick-up in rainfall during the month having an impact on electricity
demand. Meanwhile, mining output grew by 0.7% in September. In Q2, mining output growth halved to 1.3%
compared to 3.0% in Q1. For fiscal 2015, CRISIL Research expects iron ore production to decline by 5.5%
compared to an estimated 6.8% decline in fiscal 2014 due to non-renewal of mining leases in several mines in
Orissa and Jharkhand. These two states contribute to nearly 65% of the total iron ore production. However, coal
production is expected to grow by about 5% in fiscal 2015, compared to about 2.5% last year, primarily driven
by capacity expansion. Despite the de-allocation of captive coal blocks, production is not expected to be
impacted this fiscal as operational coal blocks are allowed to continue operations till March, 2015.
Overall this year, while investment driven sectors have continued to underperform, acute rainfall deficiency in the initial
months of the monsoon season is also likely to have dented farm incomes to some extent and hence consumption
demand. Moreover, while both household and business sentiments have continued to improve, these are yet to translate
into demand. Significant deleveraging of businesses given huge debt, excess capacities and sluggish sales are hindering
fresh investments, while households continue to hold back demand given low visibility on sustained improvement in
incomes and decline in inflation.
9.4
3.9
1.1
3.0
0.1
1.3
-1.0
-3.2
-6.1
IIP
Manufacturing
Electricity
Mining
Q1 FY15
Capital goods
Consumer goods
Q2 FY15
Nov13
Dec13
Jan14
Feb14
Mar14
Apr14
May-14
Jun14
Jul14
Aug14
Sep14
1,000.00
-1.3
0.1
1.1
-2.0
-0.5
3.7
5.6
4.3
0.4
0.5
2.5
Mining
141.6
1.6
2.6
2.7
2.3
0.5
1.7
2.5
4.8
1.2
2.0
0.7
Manufacturing
755.3
-2.6
-1.1
0.3
-3.9
-1.3
3.0
5.9
2.9
-1.0
-1.3
2.5
Electricity
103.2
6.3
7.5
6.5
11.5
5.4
11.9
6.7
15.7
11.7
12.9
3.9
General
Use-based classification
Basic
355.7
2.7
3.0
2.8
4.5
4.6
8.6
7.5
10.2
7.4
9.2
5.1
92.6
0.1
-2.5
-3.9
-17.6
-11.5
13.4
4.2
23.3
-3.9
-9.8
11.6
Intermediates
265.1
3.7
5.2
4.3
4.0
1.3
3.0
3.5
2.6
3.0
-0.1
1.8
Consumer
Goods
286.6
-8.9
-4.6
-0.5
-5.2
-2.2
-4.8
4.6
-8.8
-7.7
-6.5
-4.0
-Durables
53.7
-21.7
-16.1
-8.3
-9.8
-11.8
-7.7
3.6
-23.3
-20.9
-15.0
-11.3
-Non durables
233
2.2
2.8
4.6
-2.0
5.0
-2.7
5.2
1.9
2.4
-0.4
1.5
Capital
4 4
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