ANALYSIS: IIP and Inflation

Sunaina Vasudev/Mumbai 12 Aug 10 | 04:26 PM

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Economists remain divided on the possibility of a mid-cycle rate hike

given the macro economic conditions.

The Index of Industrial Production (IIP) growth rate slowed to 7.1% y-

o-y in June 2010, below consensus estimates of economists at 8.1%
as compiled by Bloomberg illustrating a moderate cooling off from the
heady numbers in the last couple of months.

DK Joshi Chief Economist, Crisil points out that the numbers have
been extremely volatile historically, and one shouldn’t read too much
into this dip. On the other hand, Arun Singh, senior economist, Dun
and Bradstreet reads this as an indication of consolidating investment
activity. He attributes the dip to the higher base from last year when
industrial production started rising sharply. “Some sectors sensitive to
the monsoons like cements have not performed well, while they saw
healthy demand last year,&" he notes.

Arun Singh, senior economist, Dun and Bradstreet adds that a

significant moderation in the Index of six core-infrastructure industries
(3.4% during Jun-10 as against 6.3% during Jun 2009), which
together have a 26.7% weightage in IIP, has also played a role in
pulling down the growth in the overall industrial production. The rate of
increase in capital goods production slowed to 9.7% y-o-y from
runaway rates of 34% and 70% y-o-y in May and April 2010.

However, Crisil’s Joshi expects the IIP to trend up to 8-9% growth

rates post the monsoons as the healthy rains should boost rural
demand, which would give it a push to an average of 9% for FY11. On
the other hand, Dun and Bradstreet expects it to clock in at 10.6% in
FY11.

The wholesale price index (WPI) rate of inflation came in at 15.66%

for the week ended July 31, trending marginally higher than numbers
for the last fortnight. Economists expect that the combination of
improving food supply dynamics pulling down food article inflation and
RBI tightening actions dampening non-food article prices, the WPI
should track down, especially as oil prices should stay soft given
global weakness. Crisil estimates that WPI rate of inflation to slip to
6.5% by March 2011, while D&B expects it to slip below 6%.

Monetary policy actions by the RBI should stay on the calibrated path
and Crisil doesn’t envisage a mid-cycle hike and sees cumulative
hikes for this year from here on of around 50 bps. Singh, however,
believes a mid-cycle tightening is possible given persistent inflationary
pressures in the economy with additional hikes in repo and reverse
repo rate by 25bps each and CRR by 50 bps in the current fiscal.
"With inflation being the dominant monetary policy concern, we do not
expect slowdown in headline IIP growth rate to cause RBI to pause its
calibrated policy normalization process," notes Ashutosh Datar, an
economist with IIFL.
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