India Economics

Feb Industrial Production – Growth remains strong up 11%; it could result in one last policy hike

➤ Feb Industrial production – in line with expectations: Industrial production rose 11% in Feb with growth led by manufacturing, up 12%; mining up 6.3%; and electricity came in surprisingly lower at 3.3% as compared with an average of 7%+ in the past few months. Other highlights include strong growth in capital goods (18.2%), basic (10.4%) and intermediate goods (13.7%). Consumer non-durables remained buoyant at 9.7%, but growth in durables came in at 1.6% - partially attributed to the base effect. Overall industrial growth during Apr-Feb was 11% and bodes well for the government's 9.2% GDP estimate for FY07.
➤ So will the RBI hike in or around its April 24 Policy? Although we expect inflation to trend below 6% from the week ending Mar 30 (data due tomorrow), we think there is a 50:50 chance that the RBI will hike its policy rates once more given that inflation is likely to remain over its target range of 5%-5.5% till the week ending May 5. Further, the RBI remains concerned on trends in money supply (22%) and bank credit (29%). While we expect policy rates to peak shortly, we maintain that the RBI will continue to use the CRR to keep liquidity tight, but could lower SLR in 2H07 to ensure credit availability for the real sector.
➤ Maintaining our macro forecasts: The near-term outlook is a bit clouded given the RBI’s recent tightening measures coupled with the government’s semi-regressive measures to dampen inflationary expectations (price controls and export bans on commodities such as cement, steel, iron-ore, etc). However, given the continuation of the key economic growth drivers coupled with the uptrend in both savings and investment both touching new highs of 32.4% and 33.8% of GDP, respectively, we expect GDP growth to sustain around the 9%
level for FY08. Key risks would be politics and much further tightening.