Oct IIP may contract 1% y-o-y; see rate hike: HSBC Global

Softening of domestic demand is a bigger worry than lower exports, says Leif Eskesen, HSBC Global Research.

He expects IIP to contract by 1 percent annually due to falling electricity and mining outputs.
Both for the WPI and CPI, he expects inflation numbers broadly in line with the previous months - above 10 percent for CPI, still above 7 percent for WPI, he adds. Below is the verbatim transcript of Leif Eskesen's interview on CNBC-TV18 Q: I wanted to discuss with you the trade data that came out yesterday and while the deficit has been narrowing, there are some concerns on the quality of data, we have seen how export growth has fallen and imports have fallen quite a bit, would you be concerned by that and not just the trade deficit number?
A: I think the export numbers have been rather well - up until now in double digits. Now, the slowdown that we saw, some of that has to do with base effect rates. So it is not necessarily a major concern at this point in time. I think when it comes to import data, to some extent the base effect is holding it back.
There were some measures taken to curb gold imports. (Despite that) I would say that the import side reflects that the economy is essentially quite soft on the domestic side. According to the latest gross domestic products (GDP) numbers that came out, there was a bit of an uptick in consumption growth, but investment growth – we are still a bit circumspect. Either way if you take it even at a face value, growth rate is still very slow. So domestic demand is still quite soft and it is also the reflection of that essentially. Q: What is your estimate that you are working with for index of industrial production (IIP) which is out later this evening along with CPI and then wholesale price index (WPI) for the month of November as well?
A: We are looking at a year-on-year (Y-o-Y) contraction of about 1 percent. That has - to some extent - to do with the electricity production and also mining. If you look at the early indicators we had up for that, they are suggesting a contraction on those two. We will have to see exactly why that is the case. Electricity production up until recently has been supported by heavy rains and that (aided) hydro power generation. Mining has also to some extent been supported up until now by the gradual lifting of the mining bans; the pick up in bauxite exports to China and things like that. So it remains to be seen whether this is going to be a trend or not.
On the manufacturing side, we are still looking at a relatively flattish sequential number but that is still high base to fight against. So it is a bit of a volatile number but I think it is quite indicative of what I mentioned earlier - that domestic economic conditions in India are still relatively subdued.
As far as the inflation print is concerned, we are expecting both WPI and CPI inflation numbers broadly in line with what we saw in the previous months. So still above 10 percent for CPI, still above 7 percent for WPI. We will have to see the extent to which food inflation may come off on the back of the improved supply conditions, which may potentially pull inflation down a little bit. But the key thing to watch out for and the key thing that the RBI also will be watching out for is what is happening to the underlying core inflation measures both for the CPI as well as for the WPI. On that front, we still expect them to remain quite stubborn if not rising from current levels. Q: That is an interesting point because yesterday the governor said the top priority still remains inflation, what would you expect on December 18 from the RBI policy meeting?
A: As the governor indicated, it is going to be very data driven at this point. So we will have to see what the data print looks like not just the headline but inflation drivers. Core inflation would be a key consideration for the RBI. I would still say on balance, I think they could perhaps be more inclined to continue with monetary tightening going forward to anchor inflation expectations. I think it is also maybe relevant to highlight all the capital inflows that have been successfully attracting into India. That also had some implications for domestic liquidity. The domestic liquidity deficit now is somewhat smaller. We also saw for a short period of time the call money market rate was moving down. I don’t think that monetary conditions are a bit too loose, if you will, relatively.  That may also be the reason to raise rate to get the call money market up a bit again. And that could help stem inflation pressures.
Another point I wanted to make as well about the fiscal stance up until now. During the first half of this current fiscal year, fiscal policy has been quite loose and we are running at around 80 percent of the full year deficit target midway through the fiscals. On some sense fiscal policies are maybe a bit too loose for comfort, maybe that is also something that the Central Bank may want to factor for the upcoming policy.