JAN IIP AND FEB CPI - MUCH BETTER THAN EXPECTED

By Ruma Dubey

No one really had any major expectations from the Jan IIP, except that growth for the first month of the calendar year would surely contract. Expectations were for a degrowth of 0.6 to 0.9%. But one was pleasantly surprised to see the Jan IIP come in at 0.1% - no real great shakes but better than a degrowth. Will the markets celebrate these numbers in a bog way tomorrow? Unlikely… we could see just a token reaction as the market is already looking ahead of May 2014.

CPI for Feb’14 came in at 8.10% V/s 8.79% (MoM) and much lower than the inflation of 9.97% which we saw in Dec’13. Thus both, IIP and CPI came in at much better rates than expected and surely, the markets will heave a great sigh of relief tomorrow – anything is good when there is nothing immediately to look forward to. The same trend of lower CPI is expected to continue for the next 2-3 months but it does not seem likely that this lowering will be sustained. Food inflation is expected to once become a cause for worry as we get into summer. Plus the unseasonal hailstorms last week in Maharashtra and predictions of El Nino getting ugly for India, with many saying that India could have a deficient monsoon are adding to the worry. Thus based on these facts, it would be too early for RBI to start reducing the rates when Mr.Rajan presents the policy on 1^st April.

Does this mean that we are turning around? Too early to sound the victory bugle. We are sure to see very incipient kind of numbers in the months to come. Q4 FY14 is expected to end with a growth of anywhere between 4.6% to 4.7% but then again, all depends on agriculture growth. But one to also remember that services PMI has been contratcting, manufacturing is hardly growing and this means. Exports are down and this thus brings us to the conclusion that GDP growth will depend on agriculture. A huge burden on the sector indeed.

Intermediaries and consumer goods are the two in IIP internals which have shown good growth. Movement of intermediaries goods is usually a prelude of the IIP expected for the next month. And this improvement in intermediaries this month probably means that Feb IIP could also surprise us pleasantly.

In the manufacturing sector, 11 out of 22 industry groups covered under this showed a positive growth. The industry group ‘Medical, precision & optical instruments, watches and clocks’ has shown the highest positive growth of 17.6%, followed by 15.2% in ‘Electrical machinery & apparatus n.e.c.’ and 14.4% in ‘Wearing apparel; dressing and dyeing of fur’. On the other hand, the industry group ‘Radio, TV and communication equipment & apparatus’ has shown a negative growth of (-) 28.2% followed by (-) 14.0% in ‘Motor vehicles, trailers & semi-trailers’ and (-) 9.5% in ‘Fabricated metal products, except machinery & equipment’.

The sectors which showed positive growth were – ‘Coir Mats and Mattings’ (98.1%), ‘Cable, Rubber Insulated’ (56.6%), ‘Air Conditioners (Room)’ (32.5%), ‘Ship Building & Repairs’ (30.2%), ‘Steel Structures’ (26.5%), ‘Cashew Kernels’ (25.0%), ‘Scooter and Mopeds’ (23.8%), ‘Vitamins’ (22.7%), ‘Stainless/ alloy steel’ (21.3%) and ‘Antibiotics & its preparations’ (21.2%).

On the other hand, sectors to show negative growth were Boilers’ [(-) 50.4%], ‘H R Sheets’ [(-) 48.5%], ‘Earth Moving Machinery’ [(-) 45.2%], ‘Aluminium Conductor’ [(-) 43.2%], ‘Grinding Wheels’ [(-) 38.9%], ‘Carbon Steel’ [(-) 37.5%], ‘Telephone Instruments (incl. Mobile Phones & Accessories)’ [(-) 30.7%], ‘Generator/ Alternator’ [(-) 26.4%], ‘PVC Pipes and Tubes’ [(-) 25.7%], Polyester Chips’ [(-) 24.4%], ‘Commercial Vehicles’ [(-) 22.6%] and ‘Aluminium wires & extrusions’ [(-) 21.5%].

Meanwhile, the news for now on the CPI is good but this is again seasonal, mainly pulled down on account of food inflation. And with the RBI Governor making it amply clear that it will eventually start using CPI and not WPI for inflation indication, this CPI cooling off comes as a good news. CPI tracks retail prices paid by consumers for finished products. There is a major difference between the WPI and the CPI as the prices differ due to subsidies, sales tax, excise duties, distribution costs. WPI on other hand is the measure of price of manufactured goods but does not measure services. With 55% of the GDP basket coming from services, with WPI not measuring services, it just does not make sense to continue with this measure.

As we now look ahead, we need to keep a watch on the events which could unfold in Crimea over the weekend and that will more or less, guide the markets in the coming week. The past three days have been tremendous for the markets and FIIs have pumped in a lot of money but remember, mutual fund houses remain sellers. Also the markets have already discounted the best case scenario w.r.t the election results.

Looking ahead, the rupee trajectory would be critical. It is really frustrating that despite RBI going behind inflation with such vengeance, it just refuses to relent and growth has become the sacrificial lamb in this fight to curb inflation. But then again, if probably RBI had not been as aggressive as it has been, maybe growth as such would have suffered as inflation would then have shot through the roof, affecting demand.

Thus under the current circumstances, we can rejoice the Feb inflation if we decide to just live for the day. But if we want to be more pragmatic and show foresight, March too might be relatively an easy month for inflation but going ahead, things might once again get sticky.