IIP a Big Surprise but a Non-Event !

The BSE Sensex closed over 120 points lower from its intraday high of 19478.79 on Wednesday after the Index of Industrial Production (IIP) for the month of October’12 expanded at a robust 8.2% versus a contraction of 0.7% in September’12. (It has registered a total fall of 246 points on 12th & 13th December'12.)

 

It is the fastest annual pace in nearly a year in October 2012 after unexpectedly contracting in September

this year, aided by a statistical spurt in infrastructure-related output.

Though analysts were expecting a rise of 4.5% in the October’12 output, but coming at 8.5% not only surprised the street but also the RBI.

 

Earlier this month, in a meeting with my bankers, one of them strongly had contended the case of a rate cut by RBI, citing the drag in the IIP data of September 2012. But looking at today’s numbers it is highly unlikely that RBI will cut rates leave alone in December 2012 but also in its mid-term review in January 2013.

Analysts have cautioned about this IIP number as it may be just a festive season demand and not a sustainable trend. Though economic activity in general has shown some signs of revival, but not to the extent that could justify an IIP growth at 8.2%.

I feel the IIP number should not be not considered as stand-alone data, one has to await other data or more data points of this IIP number to ascertain which way the economic activity is moving.

Chairman of the Prime Minister's Economic Advisory Council C Rangarajan said the RBI is likely to be more focused on consumer price index, which came in at 9.9 percent for the month of November against 9.75 percent in the previous month. Food prices for consumers rose by 11.81 percent in November from 11.43 percent in October.

The central bank has indicated that it is likely to cut rates only in January. Bank of America Merrill Lynch expects the RBI to leave key policy rates unchanged and cut CRR by 0.25 percent at its mid-quarter monetary policy review next week, which I think is highly unlikely.