Continued Momentum In Industrial Production & Slight Up-tick In Consumer Inflation Expected: Ind-Ra

The next one week is expected to be economic data heavy. Industrial production growth for October is estimated to rise to 5.8 per cent, the second best month in FY16 while consumer price inflation for November is estimated at 5.2 per cent, the highest in five months and wholesale price inflation is seen at -2.5 per cent, the highest in five months, rating agency Ind-Ra said in a report on Wednesday (09 December).

In a report, India Ratings & Research said that after the index of industrial production (IIP) attained its best growth since the last 17 quarters in 2QFY16, IIP will expand further in October 2015. The rating agency forecasts October 2015 IIP growth to be 5.8 per cent (September 2015: 3.6 per cent). At this level it will be the second best monthly IIP growth in FY16 till now (August 2015: 6.3 per cent). The growth momentum is likely to benefit from the base effect (October 2014 IIP contracted by 2.7 per cent and consumer durables output contracted by a whopping 35.2 per cent) and continued inventory build-up in view of festive season.

The drivers of IIP in October is likely to be strong performance of the electricity sector (8.8 per cent), consumer durables and robust capital goods output is expected to strengthen IIP growth. The budding investment recovery (as witnessed in 2QFY16 GDP growth) is likely to continue and would support capital goods production. However, mining sector performance is likely to remain a drag (April- September FY16:1.5 per cent). The eight core sector (38 per cent weightage on IIP) for October grew by 3.18 per cent which was unchanged compared to the previous month due to fall in steel, natural gas and crude oil output. Ind-Ra noted that industrial recovery is still in its early stages and a full blown recovery would require more policy support.

On the price index side, Ind-Ra believes that inflation has been bottoming out. The consumer and wholesale price index based inflation has been inching up since August 2015 and September 2015 respectively. Ind-Ra expects this trend to continue in November as well and forecasts CPI inflation to be 5.2 per cent (October 2015: 5 per cent) and deflation in WPI to come down further to 2.5 per cent (October 2015: 3.8 per cent).

November is likely to be the 13th consecutive month in which Wholesale Price Index (WPI) inflation remains negative. The lower WPI deflation in November is likely to be due to the continued decline in fuel group deflation. The WPI deflation to turn into inflation by early 2016, but will remain benign in the near term.

Consumer price inflation is likely to rise for the third consecutive month. Inflation in pulses and products has shown no respite and is likely to remain elevated in November too (June-October 2015: 28.6 per cent). Although a higher acreage under pulses this fiscal is likely to ease their prices post kharif harvest, Ind-Ra feels it will still be insufficient to contain the spiralling pulse prices. Ind-Ra expects CPI inflation to witness pressure during the remaining months of this calendar year; it will however remain within the Reserve Bank of India's (RBI) revised target of 5.8 per cent for January 2016.

IIP for October is expected to be released on 11 December, CPI and WPI for November is expected on 14 December.