India's inflation climbs, production in reverse gear on seasonal factors

India's inflation and production numbers out late Monday moved in opposite directions. CPI inflation rose 5.6% YoY in December 2015, above consensus and up from November's 5.4%. On the other hand, the November industrial production (IP) fell 3.2% vs Oct's 9.9% weighed by seasonal factors. 

CPI inflation inched up to 5.6% YoY in December, from November's 5.4% on unfavourable base effects. Meanwhile, Food inflation jumped on the year but eased on-month basis. Food inflation rose 6.4% YoY from 6.1%, the fastest pace in over nine months. But pressures ebbed on MoM basis, as pulses (0.2% MoM vs Nov's 3.6%) and vegetables (-7.3% vs Nov's -1.2%) moderated on seasonal factors and improved supplies. 

The part of this impact was however negated by a gradual rise in the commodity-related indices (on fading base effects). Fuel and light component inched up, while the transport and communication inflation rose 1.3% YoY from Nov's 0.6%. Bi-annual seasonal factors saw the housing index fall on the month, with some payback likely in Jan's trends. 

Service sector price pressures remain sticky and northward-bound. Further rise 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. Core inflation meanwhile crept up, with December's quarter at 4.6% vs 4.3% in Jul-Sep. Despite the firmer December print, underlying inflation trends suggest that the Reserve Bank of India's target of 6% for Jan16 will not be breached, supporting the easier policy stance adopted in 2015. 

FY15 CPI is expected to average 5% and inch up to 5.4% next year. On policy, beyond an on-hold in February, a small window to lower rates might re-emerge when base effects suppress readings around mid-year. Other factors including monsoon progress, aggregate demand conditions and fiscal consolidation need to fall into place to comfort policymakers. 

November industrial production (IP) declined -3.2% YoY from December's 9.9%, undershooting consensus. Seasonal impact from a shift in the timing of Diwali/festivities routinely distorts Oct-Nov performance. IP rose 3.3% in OctNov15, not far from Sep's 3.8% but easing from 3Q's 4.8%. The seasonal influence also depressed manufacturing activity (-4.4% vs Oct's 10.6%), weighing on mining and electricity generation. 

On the supply-end, capital goods output was the main drag down -24% (vs Nov's 16%), as the cable/rubber insulated sub-component continues to sharply influence the headline. Consumer durables contributed positively to overall IP trends, while non-durables demand remained subdued on weak rural demand. Excluding seasonal influences, the underlying production trend remains positive but lost momentum in 4Q15. This was also captured by the manufacturing PMI trends, with unseasonal floods in the southern part of the country also hurting industrial activity in the period. 

"We look for IP to average 4-5% this year, up from 2.8% year before. Overall real GDP is seen at 7.4% in FY16, marginally better than 7.3% in FY15", says DBS Group Research.