Industrial activity remains weak with contracting growth in past six months-The Total Investment & Insurance Solutions

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16Th Aug 2016

IIP (The Total Investment & Insurance Solutions) 

Industrial activity (IIP) grew by 2.1% YoY (year-on-year) in June 2016 and it was slightly better than 1.1% growth in May 2016. When analysed on trend basis, industrial activity remained weak with contracting growth in the past 5‐6 months. Weakness was concentrated in capital goods, which contracted in double digits for the seventh straight month, according to an Edelweiss research note on the economy. The Total Investment & Insurance Solutions

On consumption goods front, non‐durables continued to decline for the 12th straight month. Durables, however, continued to expand at a healthy pace of 8% YoY. Two‐wheelers, air conditioners, tyres and gems & jewellery were some of the goods that recorded good growth. Edelweiss expects industrial activity to pick up owing to improved domestic liquidity conditions, higher government spending, good monsoon, and stabilisation of exports.  

The following table and chart capture the position in industrial activity in India:

While industrial activity summarises the supplier’s position in the Indian economy, inflation summarises the consumer’s position. CPI (consumer price index) inflation in July came in at 6.1% YoY. In the past four months, CPI has been inching higher primarily led by food  prices  –  pulses  and  vegetables  –  even  as  core  remained  largely stable.  Excluding these few items, headline CPI remained under 5%. The Total Investment & Insurance Solutions

On the agricultural front, FY16-17 could see a bumper Kharif output. Besides, the international food prices have reversed course in the past few weeks after the sharp rise since March 2016. This augurs well for food inflation in the next few months. Edelweiss feels that in the next 6 months or so, headline CPI inflation could head back towards 5% levels or even below.  

With regards to monetary easing, Edelweiss expects the central bank to cut rates by 50bps in FY17. However, easy liquidity accompanied by falling global bond yields (both emerging markets and Developed markets) could result in much more cooling of 10‐year G‐Sec and lending rates. The Total Investment & Insurance Solutions

The following table and chart capture the position on inflation in the Indian economy in the current context: The Total Investment & Insurance Solutions