After contracting consecutively for 3 months, growth in factory output turned positive in January 2014 as depicted by the rise of 0.1% in the Index of Industrial Production (IIP).The poor performance of manufacturing sector which grew at -0.7% in January, continued to drag the overall number. Mining industry registered 0.7% growth while electricity sector grew at 6.5% which helped the index break its losing streak. However, at 0.1% recovery looks tepid and fragile.

There has been an upward revision of 0.4% (final revision) in the October datum while IIP for December too has been revised upwards by 0.3% (first revision).
 

Fragile recovery in IIP

Data for January 2014, released on March 12, 2014
(Source: CSO, PersonalFN Research)  

Evaluation of some of the important components of IIP for January 2014 revealed the following:
 

• Manufacturing sector which has a weightage of about 75% in the IIP, contracted by 0.7%. Half the industries out of the group of twenty two (22) industries (as per 2-digit NIC-2004) in the manufacturing sector registered negative growth. The highest contraction has been recorded in the industry group 'Radio, TV and communication equipment & apparatus' (-28.2%), which is followed by -14.0% in 'Motor vehicles, trailers & semi-trailers' and -9.5% in 'Fabricated metal products, except machinery & equipment'.
  
  On the other hand, the industry group 'Medical, precision & optical instruments, watches and clocks' has shown the highest positive growth of 17.6%, followed by 15.2% in 'Electrical machinery & apparatus n.e.c.' and 14.4% in 'Wearing apparel dressing and dyeing of fur'. Despite of such extreme performances within the sector, the negative growth was confined to -0.7% mainly because of relatively stable performance of sectors having considerable weightage in the index. Industry groups 'Food products and beverages', 'chemicals and chemical products' and 'textiles' registered relatively strong growth numbers
   
• Consumer goods index recorded negative growth of -0.6%, wherein the Consumer Durable segment continued to be under pressure as growth decelerated by -8.3% on Y-o-Y basis, while Consumer Non-Durables registered growth of +4.4%.
   
• Basic goods recorded moderate growth of 0.9%. While capital goods sectors decelerated by -4.2% in January, intermediate goods sector inched up by 3.4%. Performance of capital goods industry has been under pressure throughout the current fiscal as out of first 10 months, the sector has registered negative growth over 8 months, suggesting the stress in the sector and slack in the capex activity.
   
• Mining sector has been able to sustain the positive growth momentum it has witnessed since November 2013. Although the growth has been albeit lower at 0.74%, it has helped to negate the negative impact of slowdown in some of the industries of manufacturing sector. The growth in electricity sector has been steady over last 3 months.
   

Impact on RBI policies...
Although the IIP has fared in the positive territory, the recovery appears to be less convincing. In fact, going forward, industry may again face turbulence if other macroeconomic factors don't turn supportive. Poor performance of consumer non-durable and capital goods industries has been the cause of concern. Due to higher interest rates and tepid demand, companies are finding it difficult to finance their loans. As a result asset quality of banking sector has come under tremendous pressure. Moreover, higher interest rates are delaying the recovery in the capex cycle. Although, it has clarified in the past that taming inflation would be the primary goal of the central bank, the RBI will have a tough task of balancing among all these factors.

RBI has set 8.0% target for containing inflation measured by the movement of Consumer Price Index (CPI). Against, 8.79% recorded in January 2014, the CPI inflation fell further to 8.10% in February. Given that hailstorm and unseasonal rainfall has destroyed rabi crop in Maharashtra and Madhya Pradesh there are likely chances that food inflation may go up again. Unseasonal rainfall across northern and western India has already caused fruit and vegetable prices to move up by 10%-15%.RBI would be watchful of all these developments before taking any decision on the policy rates.

Impact on equity markets...
The lacklustre industrial growth and that especially in the manufacturing, has already been factored in the prices. Also, markets are not much impressed by the growth in IIP either as it appears fragile and inconsistent. For these reasons IIP has been a non-event for equity markets at least for the time being.

Impact on debt markets...
Debt markets are not very hopeful of any rate cut in the foreseeable future. Given the upside risks to inflation, the yields on medium and long term debt are factoring in status quo that RBI is likely to maintain, going forward. Although looks unlikely, if inflation falls considerably and sustains below 8%, lower or negative IIP may trigger a rally in bonds as markets would start speculating on policy rate cuts again.

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