IIP growth disappoints, but could get better: India Ratings

Industrial Output Growth Unchanged: The Index of Industrial Production (IIP) grew 0.4% yoy in August 2014, however remained unchanged from the previous month. This is much below India Ratings and Research's (Ind-Ra) expectation of 2.4%. The below par performance of industrial output growth over two successive months indicates the fragility of India's industrial recovery. That said, Ind-Ra expects IIP growth to regain the momentum witnessed in the first quarter of FY15 as the year progresses.

No Monetary Easing in the Near Term: Ind-Ra holds on to its view that the Reserve Bank of India (RBI) is unlikely to cut policy rates in the near term. In its fourth bi-monthly monetary policy statement on September 30, 2014, the RBI kept the policy repo rate under the liquidity adjustment facility unchanged. Despite inflation declining, the RBI Governor is of the view that it is still too early to believe that it is firmly under control. RBI would like to wait rather than make the mistake of changing the policy stance before inflation has been effectively controlled.

Manufacturing Growth Frustrates: Manufacturing growth is the pivot of overall industrial growth. However, August 2014 is the second consecutive month in which the sector recorded contraction (-1.4%). This is a bit perplexing as normally this is the time when production/inventory expands in anticipation of festival demand. However, Ind-Ra expects the sector to do well in the coming months backed by a favourable base, festive season demand and the budgetary push. Ind-Ra expects the manufacturing sector to grow at 5.3% in FY15.

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