IIP and CPI Inflation Update - Both IIP and CPI Inflation surprise positively

Key highlights 

• The Index of Industrial Production (IIP) reported a slight 0.1% growth during January 2014 after three consecutive months of contraction as against market expectations of a 1.0% decline. 
• It compares to a marginal decline of 0.2% in December 2013 and growth of 2.5% in the corresponding month of the previous year. 
• Although the headline print has come in positively, weakness in the consumption as well as investment space has remained intact. 
• A healthy 6.5% growth in electricity production has supported the overall IIP performance even as the Manufacturing sector continued to contract for the fourth straight month. 
• Excluding the performance of the Electricity sector, the IIP would have reported a de-growth of 0.5% during January 2014. 
• On a cumulative basis, the IIP reported a flat performance in the April – January period of FY2014 despite a low base of 0.9% growth in the corresponding period of the previous year. 
• The Consumer Price Index (CPI) inflation moderated for the third straight month to 8.10% in February 2014 as compared to 8.79% in January 2014. 
• The deceleration in CPI inflation can be attributed largely to easing of food inflation to 8.63% as compared to 9.87% in January 2014. 
• Nevertheless, we expect the RBI to hold monetary policy rates in its forthcoming policy on April 1, 2014 until there is a sustained downtrend in headline CPI inflation below the 8.0%-level. 

IIP: Performance on Sector-wise classification 

In terms of sector-wise classification, the Electricity sector continued to support the performance of the index for the third consecutive month. It reported a healthy growth of 6.5% during January 2014 as compared to a 7.5% growth in the previous month and 6.4% growth in January 2013. Excluding the performance of electricity production, the IIP would have reported a de-growth of 0.5% during January 2014. Going ahead

too, in February 2014, the electricity sector is expected to report a strong performance, aided partially by the base effect. 

The Manufacturing sector reported a 0.7% decline in production as against contraction of 1.2% in the previous month and 2.7% growth in January 2013. The industry groups ‘Radio, TV and communication equipment & apparatus’, ‘Motor vehicles, trailers & semi-trailers’ and ‘Fabricated metal products, except machinery & equipment’ reported 28.2%, 14.0% and 9.5% contraction in production respectively. 

The Mining sector reported a growth for the third straight month during January 2014 at 0.7% as compared to a similar print in the previous month and decline of 1.8% in January 2013. The stabilization is in line with our expectations as the low base and traction in production from opening up of certain mines are likely to be favorable for the sector

IIP: Performance on Sector-wise classification 

In terms of sector-wise classification, the Electricity sector continued to support the performance of the index for the third consecutive month. It reported a healthy growth of 6.5% during January 2014 as compared to a 7.5% growth in the previous month and 6.4% growth in January 2013. Excluding the performance of electricity production, the IIP would have reported a de-growth of 0.5% during January 2014. Going ahead

too, in February 2014, the electricity sector is expected to report a strong performance, aided partially by the base effect. 

The Manufacturing sector reported a 0.7% decline in production as against contraction of 1.2% in the previous month and 2.7% growth in January 2013. The industry groups ‘Radio, TV and communication equipment & apparatus’, ‘Motor vehicles, trailers & semi-trailers’ and ‘Fabricated metal products, except machinery & equipment’ reported 28.2%, 14.0% and 9.5% contraction in production respectively.

The Mining sector reported a growth for the third straight month during January 2014 at 0.7% as compared to a similar print in the previous month and decline of 1.8% in January 2013. The stabilization is in line with our expectations as the low base and traction in production from opening up of certain mines are likely to be favorable for the sector .

CPI inflation moderates further on easing of food inflation .The combined (rural + urban) CPI inflation during February 2014 moderated further for the third straight month to 8.10% as compared to 8.79% in January 2014. This easing can be attributed to the sequential 125bp deceleration in food inflation. Food articles, accounting for an almost 50% weightage in the index, reported deceleration in inflation to 8.63% as compared to 9.87% in January 2014 and 11.97% in December 2013. But going ahead upside risk to food inflation persists on account of unseasonal rains in some parts of the country. 

Core CPI inflation too moderated slightly to 7.91% as compared to 8.1% in February 2014, partially aided by the base effect. Nevertheless, we expect the Reserve Bank of India to hold monetary policy rates in its forthcoming policy on April 1, 2014 until there is a sustained downtrend in headline CPI inflation below 

the 8.0%-level.