October IIP figure at 5.1%, indicates serious slowdown

The figures in the table clearly indicate the negative growth trend among the industries, which further indicates that the economy is headed towards a slowdown. The IIP numbers of the previous months were also not encouraging, growing at 4.4% in Aug 2011, 1.9% in Sept 2011 and a negative 5.1% in Oct 2011. This is a serious cause of concern for the economy.

GDP growth came in 7.3% for the period between Apr-Sept 2011. The Ministry of Finance has recently revised the GDP growth rate for FY12 to 7.5%. Looking at the IIP numbers of the recent past, we would be not surprised even if our GDP growth rate for FY12 falls below 7%.

The Capital Goods sector was majorly hit, at it showed a negative growth of 25.50% in Oct 2011. Some major items in the sector that saw a huge decline were cable, insulated rubber (-82.9%), cement machinery (-74.6%) etc. on a YoY basis. The manufacturing sector showed a negative growth of 6% versus the growth of 12.3% in Oct 2010. This was on the back of a decline in production in industries like textiles, chemicals & chemical products and machinery & equipment. Mining continues to be one of the worst-hit industries, and witnessed a negative growth of 7.20%.

The Indian markets reacted negatively to the dismal IIP numbers. Both the bourses shed more than 2% today. Now, all eyes are on the inflation numbers that will be released on Dec 14, 2011 and on the RBI's announcement on its monetary stance that is scheduled on Dec 16, 2011.

Inflation has shown signs of cooling, which is evident from the fact that food inflation came in at 6.6% for the week ended Nov 26, 2011. We, at DSIJ, believe that the RBI may take a pause on its rate hikes, as inflation is coming down. On the other hand, with the advance tax payment due (15th December), and with banks borrowing heavily under the Liquidity Adjustment Facility (LAF), we may see a cut in the Cash Reserve Ratio (CRR), which will ease the liquidity pressure on the banks.