The flip side of upbeat IIP data: No rate cut?

Whew! India’s industrial output recovered in November, offering another sign of optimism for a wheezing economy.

The Index of Industrial Production jumped 5.9 percent in November, the fastest since June, and recovered from its shocking 4.7 percent contraction in the previous month (the figure was revised from the earlier estimate of 5.1 percent in today’s release).

[caption id=“attachment_179965” align=“alignleft” width=“380” caption=“The Index of Industrial Production jumped 5.9 percent in November. Reuters”]  [/caption]

So are we headed for a full-blown industrial recovery? Don’t get your hopes up just yet because IIP data is notoriously volatile.

Early signs of a recovery came in December when data showed that manufacturing surged to a six-month high and services expanded at their fastest pace in five months.

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Now, IIP data adds to the relief.

So what caused the November bounce? Almost certainly higher demand due to the festival season.

In 2010, the festival season started early October, as a result of which, October’s IIP jumped strongly over the previous month. In 2011, the festival season got fully underway only towards late October, and the impact was felt by businesses in November. There were also fewer working days in October 2011, which also fed to the contraction in data seen that month.

Breaking down the sector components of the index, we find that manufacturing, which accounts for about 76 percent, grew 6.6 percent from a year earlier.Electricity generation also jumped 14.6 percent from a year ago. However, mining output contracted 4.4 percent.

A quick look at the user-based industries showed that despite the surge in the index, capital goods output has still not improved: it shrank 4.6 percent from a year earlier, although the decline is much lower than previous months.

In contrast, consumer non-durables output jumped by an impressive 14.8 percent, followed by consumer goods output, which rose 13.1 percent. Consumer durables production also soared 11 percent from a year ago.

The big question is, will the overall trend of improvement continue? Don’t bet on it, say some experts.

“Seasonal demand and improvement in lead indicators had pointed towards a firmer production number, and that has materialised, though we see this recovery to be driven by transient forces. Moderation is in store in the coming months as lagged impact of the policy tightening comes into play,” Radhika Rao, Singapore-based economist at Forecast PTE, told The Economic Times.

Certainly, the Reserve Bank of India is unlikely to read too much into the volatile data.“I think the RBI will take comfort from the industrial output number as it shows growth is shaky but not negative. It also allows the central bank to continue to focus on inflation,” Madan Sabnavis, chief economist with CARE Ratings, who does not expect any monetary easing before the end of March, told Reuters.

In other words, no rate cut. The RBI will hold a policy meeting on 24 January.

Thirteen interest hikes since March 2010 have choked economic growth, which slowed to 6.9 percent in the September-ending quarter, even as inflation continued to hover above 9 percent (at least until November).

However, food inflation has declined sharply over the past two weeks: latest data showed the food price index was down 2.9 percent in the week ending 31 December compared with a fall of 3.36 percent the previous week, spurring hopes that wholesale inflation for December could slip to around 7.5 percent - and prompt a rate cut by RBI governor D Subbarao.

But given the upbeat IIP data, most experts believe a rate cut is unlikely for now.