Emkay expects 25bps repo rate hike in upcoming policy

Industrial Production Economy update by Emkay

IIP growth at 2 percent y-o-y is lower than consensus at 3.5 percent. The IIP data is subdued compared to the eight core industries data at 8 percent for Sep; the highest seen in the last twelve months. The Sep print reflected slowing momentum as the IIP declined 0.8 percent m-o-m on seasonally adjusted basis.

Mining, manufacturing and electricity grew 3.3 percent y-o-y, 0.6 percent and 12.9 percent respectively. The overall IIP number gained support from a) strong basic goods data evident from core data release, b) demand for consumption based items ahead of the festive season c) favorable base effect and withdrawal of monsoon leading to positive growth in mining for the first time since the last twelve months.

Oct IIP likely to contract

Tracking subdued lead indicators and an adverse base effect (8.4 percent IIP in Oct 2012), October 2013 IIP data would likely be negative.

October commercial vehicle sales contracted 19.8 percent y-o-y, truck & bus sales contracted 31.6 percent whereas passenger vehicles declined 14.4 percent. Two wheeler sales however grew strong at 18 percent; in line with 17.9 percent growth seen in Sep personal loans (highest in 2 years).

Power generation data for October suggests a significant m-o-m slump; indicating a lower single digit y-o-y growth in Electricity data for Oct IIP.

Outlook: H2 can see some revival on the back of improved consumption

We maintain that an upturn in the investment cycle is still away. However, there can be some revival in H2FY14 from consumption led impulses from a) good monsoon b) expansionary Government spending (16.6 percent y-o-y) c) surge in election related spending and d) Government push to banks towards auto and consumer lending.

We place our IIP estimate at 2 percent for FY14, while believing that consumption led revival is difficult to sustain. Meaningful recovery has to be investment driven in our view.

Interest rates to remain elevated: Amidst muted production numbers and subdued growth prospects, inflation remains a concern with Oct CPI released at 10.1 percent compared to 9.8 percent in Sep. Inflationary pressures are likely to remain intact given a) recent sharp depreciation seen in the INR and its expected pass-through ahead b) persistent high food inflation c) high Government spending in combination d) several import restrictions e) strong retail lending and f) widening of trade deficit in Oct (USD 10.6bn). With several unrelenting upside risks to inflation, we believe, there is a hardening bias to our policy rate view with another 25bps hike in repo rate in the upcoming policy announcement.

Disclaimer: The views and investment tips expressed by investment experts/broking houses/rating agencies on moneycontrol.com are their own, and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.

Read More