India inflation surges to 9.9%

Thankfully, fuel and housing prices cooled.

According to HSBC, industrial production rose 8.2% y-o-y in October (vs. -0.7% in September); well above consensus expectation of 5.1% growth and our 5.3% estimate.

Here's more from HSBC:

On a sequential bass, industrial production expanded 2.7% m-o-m (seasonally adjusted) following 2.6% m-o-m (sa) contraction in September. On a 3m/3m (seasonally adjusted) basis, IP growth rose to +6.5% vs. -5.3% in September.

By industry groups, the index-heavyweight manufacturing jumped 9.5% y-o-y (vs. -1.5% in September). Electricity production (5.5% y-o-y vs. 3.9% in July) also rose, but mining (-0.1% y-o-y vs. 2.3% in September) remain curtailed.

Within manufacturing, 'electrical machinery & apparatus' (+27%), 'motor vehicles' (+26%), 'radio, TV and communication apparatus' (+18%) and 'food products' (+13% y-o-y) were the fastest growing sectors, which clearly suggests pre-festive restocking.

By use, capital goods (+7.5% y-o-y vs. -12.9% in September) bounced back sharply in annual terms. Basic goods (+4.1% y-o-y vs. 2.8%) and intermediate goods (+9.4% y-o-y vs. 1.7% in September) also rose smartly, while consumer goods (+13.2% y-o-y vs. -0.1% in September) were the star performer. Within consumer goods, both durable goods (+16.5% y-o-y vs. -1.7% in September) and non-durables (10.1% y-o-y vs. 1.6% in September) posted sharp festive increases.

The new CPI index for November was released at the same time as the IIP and it rose to 9.9% y-o-y (vs. 9.7% in October). The increase was led by vegetables, cereals and 'clothing, bedding & footwear'. Meanwhile, the inflation print for fuel and housing and services eased.

Implications
Today's industrial production and inflation numbers offered something sweet and something sour, respectively.

The October IIP was a treat and offered a glimpse of hope..However, it should be borne in mind that the annual growth print was flattered by the shifting timing of the Diwali, which was celebrated in October last year. This, therefore, boosted the annual growth rate given this year's November timing of the Diwali. It also means that there will be some payback in November when the base effect reverses.

That being said, the improvement in October is not just a reflecting of the Diwali effect. The HSBC manufacturing PMI also improved in October and November, suggesting an underlying pickup in momentum. However, we are more likely talking about stabilization at this stage rather than a rebound.

Looking ahead and beyond November, a recovery in industrial production depends on progress on structural policies and implementation of infrastructure related projects. In this context, the ability of the government to win the recent vote on multi-brand FDI in both houses is encouraging. But, further progress is likely to be relatively slow given the political headwinds the government faces in parliament.

We, consequently, expect GDP growth to move, more or less, sideways in the near term and only recover very gradually hereafter as it takes time to get traction on reforms and see their effect. This has led us to revise down our growth forecast for FY13 to 5.2% (from 5.7%) and to 6.2% (from 6.9%) for FY14; see link below to "India Central bank Watch - Waiting for Delhi to deliver more".

With growth showing signs of stabilization and inflation continuing to rise, as evident from today's firm CPI reading,, the RBI is likely to keep policy rates on hold next week, although it may cut the CRR to Signs of easing inflation pressures and further progress on policy reforms, including fiscal consolidation, would create the space for a rate action, probably early next year. However, the room to cut the policy rate is relatively small.

Bottom line: Industrial production rose more than expected, which partly reflected the favorable base effect due to last year's October timing of the Diwali. While this base effect will reverse in November, there are signs that the underlying growth momentum is at least stabilizing. With inflation still too high for comfort and rising, the RBI is bound to stay on hold next week.