India's Inflation and production numbers on the tap

In India, apart from external uncertainties, the focus this week will be on November industrial production (IP) and December CPI inflation on Tuesday and WPI numbers on Thursday. December trade is due anytime in the week. While a payback from last month's spurt will temper November's headline IP, December's CPI inflation is expected to inch up on base effects. 

The November CPI inflation is likely to tick up to 5.8% YoY from 5.4% the month before, even as pressures ebb on month-on-month basis. Unfavourable base effects and receding boost from low oil prices should underpin the headline. But these are likely to offset by the pullback in prices of vegetables and perishables, slowing sequential price increases. 

Service sector price pressures remain sticky and had inched up to 3.8% YoY in Nov from 3.5% in Oct. Further rise towards 4% is on the cards, with an upcoming adjustment in the housing allowance under the seventh pay commission proposal likely to lift the miscellaneous category sharply into FY16/17. Disinflation in the WPI category is close to its end, with Dec's likely down -0.5% YoY and to turn positive into the Mar16 quarter. Industrial production meanwhile should moderate after Oct's sharp jump to 9.4% YoY. 

"We look for the headline to rise 3.5% YoY factoring in a payback from the festive-related pick-up in manufacturing activity", notes DBS Group Research.

Electricity generation likely slipped modestly, while mining output fluctuates around the 2% mark. Subdued activity in exports-oriented industries is likely to be offset by gradual improvement in domestic-focused units, especially in consumer goods. 

Overall, external and domestic factors will leave the Reserve Bank of India on a cautious footing. The recent bout of China-driven volatility alongside uncertainty over the US rate normalisation plans will keep the RBI from hastily lowering rates. At home, CPI inflation continues to inch up from its sub-4% trough seen in Jul-Aug15. 

At the same time, the  risks of a miss in FY16/17 fiscal targets have also narrowed scope for further monetary stimulus. Last year, the government's progressive and capex-oriented budget had seen the RBI assumed a supportive role to boost growth. However this time around, higher allotments to public sector wages and other spending commitments amid weak revenues raise the risk that fiscal consolidation might stand delayed next year.