More Rate Cuts Unlikely in FY16: Ind-Ra

Mumbai: Factory Output Surprises on the Upside: Index of Industrial Production (IIP) grew 6.4% in August 2015, much higher than India Ratings and Research’s (Ind-Ra) forecast of 4.3%. Cumulatively for the period April-August 2015 the industrial output grew 4.1% compared with 3.0% for the same period last fiscal.

This sustained growth, though still low, indicates that industrial recovery is on course. However, Ind-Ra believes that the key drivers for the August 2015 uptick in industrial output are (i) the base effect and (ii) the inventory build-up for the festival season. Interestingly, last year this inventory build-up was missing and the industrial output had collapsed in 2QFY15. Ind-Ra expects the industrial momentum seen so far this fiscal to continue in the 2Q and 3Q of FY16 in view of the festival demand, but feels that a full blown recovery may still be some distance away.

More Rate Cuts Unlikely in 2HFY16: Consumer Price Index (CPI) inflation increased to 4.4% in September 2015 from 3.7% in August. This increase in CPI inflation was expected due to the waning of the base effect. The CPI inflation will witness pressure even during the remaining months of this calendar year, but Ind-Ra believes it will still remain within the Reserve Bank of India’s (RBI) revised target of 5.8% for January 2016.

Ind-Ra feels RBI has nearly shut the door on further rate cuts in FY16 by calling the 50bp repo rate cut, “a front-loaded policy action”, in its fourth bi-monthly review on 29 September 2015. Nevertheless, Ind-Ra believes that if conditions permit, RBI’s policy stance will continue to be accommodative. In the near term, however, RBI will work with the government to clear impediments to the transmission of the cumulative 125bp cut in the policy rates.

Tenth Consecutive Month of Growth in Manufacturing: The encouraging part of the recovery is that it is led by the manufacturing sector. The manufacturing sector grew 6.9% in August and has cumulatively grown 4.6% this fiscal so far (2.0% over the same period in FY15). No doubt this sustained, albeit low, manufacturing sector growth is largely driven by domestic demand as external demand continues to be tepid. Ind-Ra expects manufacturing sector growth to remain buoyant in the near term due to the onset of the domestic festival season.

15 of the 22 industry groups in the manufacturing sector grew in August 2015. Based on the weights in IIP, the top five items which contributed most to the IIP growth in August 2015 were gems and jewellery, sugar machinery, HR sheets, fruit pulp, cable & insulated rubber. The top five negative contributors to the IIP growth were instant food mixes, grinding wheels, CR sheets, stainless/alloy steel, and furnace oil.

Healthy Growth in Capital and Consumer Durables: In August 2015 all the use-based sectors posted growth. The growth was led by capital and consumer durables which grew 21.8% and 17.0% respectively. Ind-Ra believes that a very low base helped both these sectors post double-digit growth in August 2015; and that a turnaround in the fortunes of these sectors is now visible. While the capital goods sector has clocked back-to-back double-digit monthly growth for the first time since December 2010, consumer durables witnessed three months of consecutive double-digit growth for the first time since March 2011.

Core Sector – Low Growth: The eight core infrastructure industries, comprising 37.9% of the weight of items included in IIP, grew 2.6% in August 2015. With the exception of steel all other industries namely coal, crude, natural gas, refinery products, fertilizer, cement and electricity posted growth in August 2015. Growth in the core sector so far this fiscal is just 2.2%.