India's factory output recorded 6.8 per cent growth in January, coming in well above expectations and consensus estimates.
It was substantially higher than the 2.5 per cent growth recorded in December last year. The January rebound was led by manufacturing, which accounts for nearly four-fifths of the index for industrial production.
The January industrial output performance was, however, lower than the 7.5 per cent growth in factory output in same month last year.
The robust industrial output number in January is likely to be good enough to keep the Reserve Bank of India on hold as regards repo rate when it meets later this week for a policy review, say economy watchers. Given the volatility in IIP data and high inflationary expectations, the RBI is likely to keep the repo rate unchanged for another month or two, according to economists.
Mixed views
Top policymakers, however, had mixed views on the January IIP print and whether the latest buoyancy signalled an end to the downtrend in industrial activity.
While the Finance Minister, Mr Pranab Mukherjee, described the January 2012 industrial output as “strong recovery” in the backdrop of December 2011 performance, the Planning Commission Deputy Chairman, Mr Montek Singh Ahluwalia, said one would have to wait for February data before coming to any conclusion on whether downturn has ended.
Dr C. Rangarajan, Chairman of the Prime Minister's Economic Advisory Council, felt that policy rate cut by the RBI depended on inflation movement. The inflation data for February will be released on Wednesday, ahead of the mid-quarterly policy review on Thursday.
The factory output recovery in January this year is not broad-based. More efforts are needed to promote areas such as mining and capital goods, which recorded negative growth rates in January, Mr Mukherjee pointed out.
Mr Ahluwalia said that IIP data moving up close to 7 per cent is a good development. But one month data are not good enough to come to any firm conclusion, he told reporters here.
“If this continues in next month, then it indicates that the economy is now ready to move back to more normal growth rate ”.
Reacting to the IIP numbers, Moody's Analytics said that the strong production number in January as well as last week's cut in banks' cash reserve ratio should be enough to keep the RBI on hold for at least another month, possibly two.
“We won't be changing our India forecast in response to a single number, but we'll be monitoring the data closely in the coming months. If this strength is maintained, we'll have little choice but to take our piece of humble pie and quietly lift the forecast. We're still bearish, but we're wavering.”
Mr Samiran Chakrabarty, Regional Head of Research, India, Standard Chartered Bank, said that one should not read too much into the latest IIP print, which has been largely influenced by the big growth in food products industry group.
“Our view remains that only in April will one see some policy rate cut.”
The IIP numbers for January should be looked with caution, said Dr Arun Singh, Senior Economist, Dun & Bradstreet India. The sudden high growth in the consumer non-durables segment seems confounding, he said, adding that RBI is likely to hold repo rate constant till April-May 2012.