Ind-Ra: Modest Improvement Expected in IIP and Stable Retail Inflation

Industrial production in February 2016 is likely to show better performance than the previous consecutive three months of negative growth and on the prices front wholesale price deflation will continue and retail inflation to remain flat in March 2016, says India Ratings and Research (Ind-Ra). Ind-Ra estimates the Index of Industrial Production (IIP) growth for February 2016 at 1.2% and March 2016 Consumer Price Index (CPI) and Wholesale Price Index (WPI) based inflation at 5.1% and -0.1% respectively.

Ind-Ra believes the recovery in industrial production will be gradual. Ind-Ra expects IIP to move into positive territory and clock a growth rate of 1.2% yoy in February 2016 as against a contraction of 1.5% yoy in January 2016 and an average decline of 2% in industrial output in the last three months. The expected uptick in industrial production is likely to be led by the improvement in core sectors of the economy. The eight core industries that comprise around 38% of IIP grew 5.7% yoy in February 2016 as against 2.9% yoy in the previous month. Electricity, which has a weight of 10.3%, led the growth in the core sector with a growth rate of 9.2% in February 2016. Ind-Ra believes electricity production will give an impetus to overall industrial production in February 2016. Growth in the manufacturing sector, which has a weightage of 75.5% in IIP, is likely to remain subdued. Manufacturing growth contracted 2.8% yoy in January 2016, which was the third consecutive month of decline.

WPI has been negative for the last 16 months; however deflation has seen some moderation in January and February 2016 but is likely to remain negative in March. WPI is expected to contract 0.1% yoy in March 2016 as against contraction of 0.9% yoy in the previous month. Manufacturing and fuel prices are likely to remain a drag on wholesale prices. Prices of manufacturing goods declined 0.6% yoy, while fuel prices declined 6.4% yoy respectively in February 2016.

Ind-Ra expects March 2016 retail inflation to remain stable at 5.1% yoy (February 2016: 5.2% yoy, January 2016: 5.7% yoy). Soft oil prices (although 19% higher than February 2016) and moderation in food prices will keep retail inflation in check and within the RBI's comfort zone. The central bank, in its first bi-monthly review for this fiscal on 5 April 2016, stated that it expects CPI to moderate and remain around 5% during FY17 with some inter-quarter variations.

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