November IIP shows signs of economic recovery

The November IIP data has come in on a far more optimistic note than expected at 5.9 per cent on account of good growth seen in the electricity, consumer goods and consumer non-durables’ sectors. The capital goods output which was last month seen struggling at a negative 25.5 per cent has also managed to make some ground to stand at negative 4.4 per cent for November 2011. During the April-November period this fiscal, IIP growth stands at 3.8 per cent, as against 8.4 per cent in the same period last year.

One glance at the above table may suggest that all the nine sectors constituting the overall IIP data have managed to grow out of the sluggishness seen in the month of October and show some promising signs of economic recovery. However, it would be very premature to draw any conclusion yet, as one must remember that the data for the month of October and November was collected against the backdrop of the festive season of Diwali. The true picture of conformation in economic recovery is likely to be presented by the December IIP data.

As far as the markets are concerned, there was a slight recovery of sorts after the November IIP data were announced. But unfortunately the IT packs dampened the sentiments and consequently the markets nose-dived with the Sensex currently treading near the 16,000 mark. There was also a rally in the capital goods’ scrips of L&T and BHEL but it couldn’t be sustained.

Meanwhile, the IIP growth figure for October this year has been revised to negative 4.7 per cent from the provisional estimate of negative 5.1 per cent. Now all eyes will turn towards the headline inflation data for the month of December, which is expected to be announced on January 16, 2011. As a reminder, the inflation data for November was at 9.11 per cent.

Judging by the recent cool-off seen in the inflation numbers over the past few months with the latest set of weekly inflation data suggesting a negative growth in prices, we expect the December inflation to ease off significantly below the 9.11 per cent seen in November.

Going forward, we expect the RBI to initiate reversal in the interest rate cycle at its policy review on January 24. The central bank may either cut back on the CRR or the repo rates, which would really help to give a new impetus to market sentiments.