Industrial growth better-than-expected though still muted; inflation up marginally

Industrial output grew 2.6 per cent in January, better than what economists had predicted but much slower than the pace at which it needs to grow to support the projected high GDP growth in the country. Meanwhile, consumer inflation rose marginally to 5.37 per cent in February but remains well under RBI's comfort zone.

Industrial output as measured by Index of Industrial Production (IIP) rose faster than the expectations of under 1 per cent growth and even better than 1.7 per cent it notched up in December. The rate of growth was somewhat in contrast to the activity figures of eight core industries released last week. The index of eight core industries, which constitutes 38 per cent of the IIP, slumped to 1.8 per cent in January.

During the April-January period of 2014-15, industrial output grew 2.5 per cent.

The IIP data provides a new lease of life for the government which is banking on industrial activity to prop up the growth in the economy. The government presented its first full term Budget last month, with an aim to improve investments in infrastructure and to crowd-in private investments and hoped to boost manufacturing sector with lower taxes on inputs.

The mining sector saw a decline in output though at a relatively slower pace than last month (-2.8 per cent against -3.2 per cent growth in December) while manufacturing sector grew at a faster pace at 3.3 per cent (2.1 per cent in December). Electricity generation, on the other hand, lost significantly expanding at just 2.7 per cent in January down from 10 per cent in November.

The cumulative growth in these three sectors during April-December 2014-15 over the corresponding period of 2013-14 has been 1.3 per cent, 1.7 per cent and 9.3 per cent, respectively.

In terms of industries, 14 of the 22 industry groups in the manufacturing sector have shown positive growth during the month.

According to use-based classification, basic goods output was up 4.5 per cent, capital goods was up 12.8 per cent while intermediate goods contracted by 0.8 per cent. The rise in capital goods output is encouraging as it is a lead indicator of business activity picking in the near term.

Within the consumer goods basket, consumer durable and non-durable declined 5.3 per cent and 0.1 per cent, respectively, with the overall consumer goods falling 1.9 per cent.

Consumer prices inch up but remains within comfort zone

Consumer inflation rose to 5.37 per cent in February compared to 5.19 per cent in the previous month on account of higher food prices. Although the inflation rate rose, it is still well within RBI's comfort level and remained below its new flexible inflation targeting zone of 2-6 per cent.

Inflation rate was a tad bit higher than the median forecast of 5.23 per cent from a poll of 24 economists conducted this week.

This would be the second release under the revised methodology and base rate. The government recently revised the product basket used for determining the consumer price index and also changed the weight shares for commodities. It also changed the base year for calculating consumer prices to 2012 from 2010 in sync with that of other national economic statistics.

According to the government’s statistical wing, prices of milk and dairy products rose by 9.1 per cent while that of vegetables and pulses increased by 13 per cent and 10.61 per cent, respectively.

Would RBI hold on to rate cut?

The central bank unexpectedly slashed policy rate last week to 7.50 per cent, the second time in less than two months. The question is whether the central bank, which has recently tweaked the policy further and is now following a flexible inflation targeting with +/- 2 per cent around the 4 per cent mark, cut rates again in the April 7 meeting.

The policy on rates would be clearer after the US Federal Reserve meeting next week where analysts are expecting the American central bank to give a clarity on interest rates. After a string of strong data, including the recent non-farm payrolls which point out that the economy added close to 3 million jobs last month, the Fed is expected to hike rates soon.

The expectations of an early rate hike had brought jitters to the emerging markets with Indian currency falling around 3 per cent after the announcement and Nifty and Sensex losing around 2 per cent each. Both have recovered partly since then.

(Edited by Joby Puthuparampil Johnson)

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