RBI has fresh data to chew on when it goes into its December 2012 mid term policy review. IIP and Export growth were negative for the months of September and October 2012 respectively while inflation fell for the month of October. RBI had guided markets for possible rate cuts in January 2012 as the central bank was expecting inflation to trend higher than 7.8% for the months of October and November. The fall in inflation to 7.45% in October from 7.81% seen in September could well force RBI’s hands for a rate cut in December.
The IIP (Index of Industrial Production) growth data for September 2012 and the provisional trade data for October 2012 were released on the same day in November the 12th of November. The data came in weak and spoilt Diwali celebrations for the market with the Sensex and Nifty closing down in token Diwali day trading on the 13th of November. However the inflation data released on the 14th of November has given some solace to the markets as negative IIP growth and falling inflation rate is positive for rate cut expectations. RBI may well cut rates in December 2012 rather than January 2013. RBI had guided markets for rate cuts in January 2013 in its 30th October 2012 monetary policy review.
The IIP growth for September 2012 was a negative 0.4% on a year on year basis with manufacturing growth at a negative 1.5%. IIP and manufacturing growth for September 2012 was a negative 0.9% and 0.7% respectively on a month on month basis. The April-September 2012 IIP growth was at 0.1% against a growth of 5.1% seen in the same period last year. Manufacturing growth in the April-September 2012 period was at -0.5% against 5.5% seen last year. IIP growth trends reflect weakening demand in the economy and also reflect weak export growth due to sluggish trends in the global economy.
Trade data for October 2012 showed export growth at a negative 1.6% on a year on year basis. April-October 2012 export growth is a negative 6.2%. The fall in export growth reflects the poor global trade conditions due to economic woes in most parts of the world. Imports for October 2012 rose 7.4% on a year on year basis led by oil import growth of 31.6%. Trade deficit for October 2012 stood at USD 21 billion, the highest level fiscal year to data. The rising trade deficit will pressure the CAD (Current Account Deficit), which at 3.9% of GDP for the first quarter of 2012-13 is at higher levels. Rising current account deficit places pressure on the Indian Rupee, which has fallen by 4% from highs over the last couple of months.
Inflation as measured by the WPI (Wholesale Price Index) came in at 7.45% for the month of October 2012, down for September 2012 levels of 7.81%. Food inflation fell to 6.62% in October from 7.9% levels seen in September. Manufacturing inflation fell to 5.95% from 6.62%. Falling food and manufacturing inflation helped negate the high fuel price inflation that stood at 11.7% in October.
Gross direct tax collection grew by 6.6% in the April-October 2012 period with corporate tax growth at just 2%. Tax collections are weak forcing the government to increase full year 2012-13 borrowing by Rs 20,000 crores. Passenger car sales grew 23% in October 2012 on the back of festive season demand. However overall vehicle sales was 9% lower in October as demand for two wheelers and commercial vehicles were muted.
Monetary aggregates of deposit and credit growth are within RBI estimates of 15% and 16% respectively with deposit growth as of October 26th 2012 at 13.4% and credit growth at 16%. Demand has not picked up in the economy despite the festive season as seen from various data including credit growth, tax collections and vehicle sales.
Bond markets will start positioning for rate cuts in December given the weak data and the positive inflation numbers.