See contraction in Nov IIP; RBI to focus on inflation: HSBC

Q: What are your expectations from the IIP figures this evening?

A: We are actually looking for a contraction. So, year on year negative growth of 0.5 percent, a little bit better in some sense relative to the previous months but nevertheless still a contraction.

If you look at it by components, mining and electricity production likely picked up that is what the infrastructure index suggests.

If you look at the manufacturing sector although there might be a little bit of a sequential recovery stabilization from the previous months they are still firing against a relatively high base from the previous years. So, that would still keep that in negative territory. By use we are expecting a slight recovery when it comes to basic goods consumption in terms of year on year growth numbers there. However the weak point would probably be capital goods, it is a very volatile fellow as we know. So, that is part of the reason for that.

One point I would also highlight is that November was the month we had Diwali and that also could have implications for the number of days of business actually being open. That is why we are essentially looking at a negative growth number still.

Q: In your opinion incase we do get a negative IIP figure today will it affect the RBIs decision in late January or is it just going to be inflation focused?

A: They will look at both. Inflation rightly is the primary concern. This would sort of add to the mix of weak economy data we have seen now. They would look very closely at the inflation prints.

If we do get a slowdown in headline CPI even if it’s driven by food inflation, and core inflation still remains relatively stable that increases the chance that the RBI might want to consider extending the pause. In my view it shouldn’t.

I think RBI should actually have tightened monetary policy back in December. They should continue to tighten monetary policy into this year. Inflation is too high; you need to have a more decisive monetary policy response if you want to keep inflation under control.

You need to move a little bit away from this sort of incrementalist approach to monetary tightening.

Core inflation is the key thing to look out for; in India it is running at 8 percent and that is too high. We don’t really see core inflation coming off unless you have a bit more I would say decisive steps in terms of monetary tightening, unless you have more traction on supply side reforms that in a sense improve conditions on that side of the economy.