IIP shocker; see no near term rate cut from RBI : Barclays

The September index of industrial production (IIP) slipped to a negative 0.4%, disappointing the market to a large extent. Siddhartha Sanyal of Barclays Capital describes the contraction in IIP as a shocker. He was expecting a better number, taking into consideration the decent core IIP number.  

Also read: Weak IIP, mkt awaits fresh cue to move ahead: Rada Advisors
According to Sanyal, a slowdown in the capital goods segment is not the only factor to be blamed for the weak IIP figure. The consumer goods space also contributed to the number, he added. However, he is not very hopeful of seeing any significant rate cut from the Reserve Bank of India in the near term. Sanyal believes there could be a 50 bps rate cut in the next quarter. Here is the edited transcript of the interview on CNBC-TV18. Q: These are the initial numbers that we have, overall IIP de-growth of 0.4 percent, huge knock in capital goods this time around and manufacturing as well has seen a de-growth. What is your sense in industry activity in general because there was a feeling that perhaps it has bottomed out and how would you react to this number today?
A: This contraction is pretty much a shocker. We were expecting a number far higher, particularly given that the core IIP number has been pretty decent this month. We do not expect any meaningful turnaround in economic momentum per se but, given that the numbers this time and last year has been extremely weak. Statistically, the numbers should have seen some kind of a fillip from this point onwards. But, the current numbers just underscores the volatility in our IIP numbers. Q: Where does this leave the RBI now because there is some mid-quarter policy review in December, give us a sense in terms of growth. With the stagflation kind of a scenario now becoming more prominent, what do you think the RBI is possibly going to do come December-January?
A: That is a pretty important point. I think the IIP number sounds more puzzling because if the slowdown is entirely due to the capital good segment, we would have possibly seen an indication or we should have got an indication from the core IIP number as well. But, the core IIP number had been pretty good this time, so a bulk of the slowdown might have actually come from some kind of big slowdown in the consumer goods.
There might be a bit of a slowdown in consumer goods number also, which would have been holding up the IIP number or providing some support to the IIP number till sometime back. There can be a few explanations like production numbers ahead of the festival season with one to two month kind of a lead keep fluctuating quite a lot.
It might be that one of a kind fluctuation but, if we get to see some kind of softening or some kind of a serious slowdown in consumer goods segment from this point onwards, it will possibly be a very-very alarming situation. I hope that is not really the situation and I expect IIP numbers to be somewhat better than the current numbers going ahead.
RBI policy is pretty much a fix for them. They have made their stance very clear. As of now, in the very near term they are willing to provide support to the market through liquidity support but, any significant rate cuts are still a few months away and possibly for the next quarter we can factor in 50 basis point rate cut. But, as of now, no rate cuts in the current quarter.
_PAGEBREAK_ Q: What would you be expecting on WPI on Thursday?
A: We are expecting a number around 8 percent. The important thing here is what exactly we get to see on the core inflation front because given the fuel price hike already affected, we do not see any softening in the headline number going ahead. But, if RBI needs to deliver a rate cut, it would have to have some kind of a softer core inflation number. That will be much more important.
Our sense is that over three-six months kind of a timeframe, it should soften below 5 percent mark but, as of now we are more than 5.5 percent and that remains some kind of a worry. I will be watchful of that. Q: Give us a sense with regards to the capital goods figure, it is down 12 percent. Do you think that the volatility has come back because in the previous month it was down only around 2 percent odd? How difficult is it to estimate what is happening in the capital goods sector and what would your estimates for FY13 be then?
A: The capital goods sector has been a forecaster's nightmare and this has caused huge volatility to the IIP numbers on a month to month basis. But, in order to have some kind of a meaningful analysis, you cannot look at the capital goods numbers on a month to month basis.
You need to see it possibly on a three month moving average kind of a path. But, unfortunately there has not been any meaningful turnaround in that. My sense is that going ahead, the IIP numbers overall will remain choppy but, with some kind of an upward bias for the second half.
Even if the statistical figure looks somewhat better, you should not take it as a meaningful turnaround in the economy particularly, in case of manufacturing. Some kind of policy support remains the need of the hour in the next few months. Q: What will the manufacturing sector pick up look like in the second half of the fiscal after what we have seen today? Would you have to change or scale down your GDP growth estimates for FY13?
A: As of now, the first half IIP number is averaging close to zero and more often than not the number had been around 0-2 percent kind of a range. My sense is that simply because of the base effect, the numbers will look more like 4-5 percent more often than not in the months in the second half.
As such there will be some kind of upside to the current IIP number. We are factoring in a number around 3 percent, 3 percent plus for the IIP and that way we are still comfortable with the 5.8 percent kind of number we have for overall GDP for the full year. But, obviously risks remain and quite a lot will depend upon the upcoming months and what we get to see in terms of policy support going ahead as well. Q: Will this IIP number have any bearing on the policy stance at all by the Reserve Bank? How many more quarters of painful numbers do you expect to see, both in terms of low single digits or in terms of a negative IIP number?
A: This IIP number remains a shocker for everyone, no doubt about that. Having said that, given the volatility in IIP, typically policymakers and the market tend to take IIP into consideration not in isolation, not on one particular month's number. The important thing is what we get to see in the next one or two prints. There is a possibility that this particular month's number remains some kind of a one-off  and the volatility in production related to the seasonality part eases a bit and the numbers start looking slightly better.
But, as such as we are repeating again and again, even if numbers look somewhat better there is no real improvement in overall economic momentum going ahead, possibly for the next 2 to 3 more prints. At least till the mid of 2013 you do not expect any significant turnaround in the economic momentum of the system.