High industrial growth, rising inflation may lead to CRR hike

High industrial growth, rising inflation may lead to CRR hike

Strong consumer demand and an export recovery fuelled industrial growth in November. The main reason for the high growth number, however, is last year’s low base. This impressive number coupled with rising Wholesale Price Index inflation is likely to lead to a 50 basis points (bps) hike in cash reserve ratio (CRR) on or before the monetary policy review on 29 January.

In line with our estimate, but substantially ahead of the consensus estimate, industrial production growth in November at 11.7% was the highest in over two years. On a month-on-month (m-o-m) basis, industrial production grew by 3%. Manufacturing, consumers intermediates are leading the growth. Both manufacturing and mining, with 12.7% and 10% growth, respectively, managed a robust growth, while electricity decelerated, posting 3.3%.

Within the use-based categories, while consumer durables growth was at 37.3%, intermediate goods and capital goods registered robust growth of 19.4% and 12.2%, respectively. Consumer non-durables registered a 3.1% growth, which was a drag.

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Though the low base was the key in generating the impressive Index of Industrial Production (IIP) growth numbers, there was m-o-m improvement in industrial production in November. We believe the festive season in October contributed to the m-o-m improvement.

Export growth turned positive in November after 13 consecutive months of decline, boosting industrial growth in the same month. Strong demand in consumer durables, including auto, also contributed to strong industrial growth. Segments of the industry, including textiles, transport equipment and machinery and tools, showed impressive rebound. However, a major part of manufacturing, including food and beverages, chemicals and metals and metal products, are still operating with sizeable excess capacity. Gas production at Krishna-Godavari basin is helping mining, but electricity production does not show any marked improvement.


The low base coupled with some m-o-m improvement is likely to keep IIP growth close to double digits until May. This would take FY10 growth to around 8%. Industrial growth in FY11, however, is likely to be lower than that in FY10. A symbolic hike of 25 bps in the policy rate, although not imminent, may come on or after the January policy.

Graphics by Yogesh Kumar/Mint