India’s industrial output to grow moderately in Q1 2016, inflation to be close to RBI’s trajectory

India’s industrial output had lost momentum towards the end of 2015. However, it is likely to grow moderately in Q1 2016, according to DBS Bank.

“We look for headline IP to fall by a smaller -0.5% YoY from -1.5% the month before. The heavy-weight manufacturing sector likely edged up on higher durables output, also getting a hand from over 9% rise in electricity generation as signalled by the core industries index”, noted DBS Bank.

However, output of base metals is being interrupted by weak commodity prices. Momentum of capital goods and consumer goods is mainly focused on, especially with capital goods declining for the last three months. This does not bode well for investment spending trends, added DBS Bank. In December 2015-January 2016, production trends, excluding capital goods, were moderately optimistic.

Meanwhile, India’s CPI inflation is expected to be near the Reserve Bank of India’s trajectory. CPI inflation is likely to reach 5.1% y/y in March from February’s 5.2%, taking the Q1 2016 CPI to 5.4% and the fiscal year 2015-2016 inflation to 4.9%, said DBS Bank. Inflation in India has been easing for the past two years and is likely to average 5%-5.5% in 2016, added DBS Bank.

External factors such as low global disinflationary forces, modest rise in minimum support prices for agri produce and easing domestic rural wages have assisted in easing the high food inflation from 6.6% in FY 2014-2015 to likely about 5.2% in FY 2015-2016, said DBS Bank. However, structural barriers of weak and physical infrastructure will make it tough to decelerate inflation, noted DBS Bank.

The Reserve Bank of India has set benign inflation targets in its policy guidance; however, it has kept a balanced outlook. The central bank has set CPI targets at 5.1% for March 2017 quarter and 4.2% in March 2018 quarter. Meanwhile, there are risks on the upside from uncertainty regarding global oil prices, monsoon progress, said DBS Bank.

“We expect inflation to average 5.4% this year, modestly above the central bank’s target (excluding pay commission impact)”, added DBS Bank.