IIP grew on monsoon recovery, improved sentiment: StanChart

The Index of Industrial Production (IIP) for the month of August moved up at 2.7 percent against a meagre -0.2 percent (revised from 0.1) in July. Data showed manufacturing, which constitutes about 76% of industrial production, grew at an annual rate of 2.9% from a year ago period.

Samiran Chakrabarty of Standard Chartered Bank is positively surprised with the August IIP figure and believes the momentum shift in the consumer goods sector is important and expects it to continue further. The better monsoon from July has also played a role in changing sentiment, he feels. 
"The recovery in the consumer goods segment was much needed because there are some indications that it might have been slowing too fast. If at least you have arrested that fall, that is a positive. Delayed monsoon could be one of the reasons why it declined at a very fast pace. Now that the monsoon is recovering, the sentiment has definitely improved in September-October," explained Chakrabarty.
Chakrabarty is also not hopeful of a repo rate cut and expects the RBI to cut CRR, if the central bank goes for further easing during its next monetary policy meet on October 30. Here is the edited transcript of the interview on CNBC-TV18. Q: 2.7 percent on August, the consumer price inflation is coming in at 9.73 percent but looks like the worst is over you would say? Chakrabarty: Anyway the August data was before the sentiments changed in September. I would tend to think that the turnaround that we have seen in August might be continued further. At least the momentum change in the consumer goods sector is important.
My sense is that possibly the better monsoon from July onwards might have a role to play in changing that sentiment. Still little bit worried about the capital goods component. I don’t think that’s recovering fast enough. Otherwise, this number is definitely better than what the market had expected. To that extent, definitely a positive surprise. Q: What is your opinion with regards to the consumer durables number this time around or rather consumer goods which is back at around 5 percent in terms of a growth, how would you read that, would it be a positive for you? Chakrabarty: Yes, the recovery in the consumer goods segment was much needed because there are some indications that it might have been slowing too fast. If at least you have arrested that fall, that is a positive. As I was mentioning, delayed monsoon could be one of the reasons why it declined at a very fast pace.
Now that the monsoon is recovering and getting back to more or less normal trajectory, I guess that could be one of the reasons and since the sentiment has definitely improved in September-October and equity markets have been better, I would believe that consumer sentiment might have picked up again driving a recovery in the consumer goods segment. Q: What are you going with if it is a bottoming out already that you are seeing and you are seeing an inflation number of this order plus there is a stealth easing that has already happened of a significant nature. What will you expect from the RBI? Chakrabarty: The question is about the stealth easing that’s already happening, does RBI want to push that stealth easing even further or not or does it think that it is on auto pilot and it will continue regardless of its stance? If it thinks that it needs to give it one more hand, then I would tend to think that the CRR cut is more likely than a rate cut.
But, if it thinks that enough is enough, this 100 bps reduction given the current growth inflation dynamics is good enough for the system and lending and deposit rates have also come down adjusted, so why push it harder by doing a repo rate cut?
 
Repo rate cut has of late become more of a signalling tool than anything else. From the credibility perspective, if inflation number stays high at 7.70-7.80 percent kind of range then it is difficult for RBI to justify a repo rate cut. At the same time, I am positively surprised by the September CPI print at 9.73 percent. I think it is a decline of about 20 bps from where it was last time. So if with a diesel price hike we are getting a slightly lower CPI print that should be a positive.
_PAGEBREAK_ Q: What is your opinion with regards to the trend of IIP because if you look at the YTD performance for IIP as of now, I think around four out of seven months we have reported a bit of a negative trend or a negative number for an IIP figure, how exactly do you expect it to pan out for the remaining part of the fiscal and how skeptical would you be about this 2.7 percent figure in terms of a possible revision on the downside? Chakrabarty: My sense is that consumer goods segment of IIP might do slightly better compared to the first half of the year. But I am still worried that the capex segment might not be picking up as quickly. That is why you might see a relatively better IIP trend for the second half of the year compared to the first half of the year. But, that difference might not be as spectacular as one would have anticipated in the beginning of the year.
Overall, because of lower base we were anticipating the GDP in the second half also to be much better by our current estimation. The difference between the first half and the second half might not be as acute as one would have thought. Q: Trade deficit numbers came in yesterday at an ugly USD 18 billion plus for the month, the second highest in terms of monthly tally. Does that set the pitch for RBI in some fashion? Chakrabarty: Absolutely, that was my initial reaction as soon as I saw the data. But, apparently there are some technical issues because of which this number might have gone up. I will wait for a clarity on those technical issues because otherwise USD 18 billion trade deficit number is too much out of whack. Q: What is this technical factor, you mean bad counting as they have done in the past? Or is it just an incorrect number? Chakrabarty: Apparently in oil import bill, import of one refinery was counted whereas the export part of that refinery was not counted in the oil export number. Whether this is accurate or not, I don’t know. But, if that is the reason behind this discrepancy then it’s possible that the number is not as ugly as one would have thought.
Overall, it reiterates the point that we cannot take our eyes off the current account deficit issue, it is still very much a live issue which needs policy attention and that could be one of the reason why RBI might not want to go too soft on growth as yet.