Industrial production came in with a sluggish growth of 1.6% in Dec 2010, much weaker than previous month of 3.6% (revised from 2.7%) on the back of weaker growth in manufacturing activity which expanded just 1% in Dec'10 as compared to 3.2% (revised from 2.3%) in Nov'2010. The pace however seems to have weakened across sub-sectors in December month. It was the lowest growth we have seen in last 20 months. Cumulative growth (Apr-Dec 2010) at 8.6% is at par with the growth in the corresponding period of last year.

Trend growth in capital goods has remained fairly volatile in last few months with a negative of 13.7% in December month. This negative growth is largely contributed by higher base effect and a fall in investments which seems sharper than consumption. Sticky nature of Inflation and higher borrowing cost as a result of increases in key policy rates put pressure on the investment side. Important items registering highly negative growth include `Computer system and its peripherals' [(-)52.2%], `Agricultural implements' [(-) 49.6%], `Ship building and repair' [(-) 46.7%], `Insulated cables/wires all kinds' [(-) 42.5%] and `Material handling equipment including wagon' [(-) 35.6]

Negative growth in Consumer non durable goods such as Cigarettes (-34.3%) and Hair oil (-34.2%) can be largely attributed to higher inflationary pressures that mutes the outlook for domestic consumption demand especially in non durable segment.

Electricity, Intermediate Goods and Consumer Durables were the only sectors posting higher growths as compared to previous month.

OUTLOOK

Disappointing numbers in December month should not be misunderstood as a collapse but a slowdown. We expect that with the easing liquidity in the system and clear indications by RBI in terms of policy rates will provide comfort to the Corporates for further capex or investments. A similar growth of FY10 is unlikely to be continued in this fiscal as the former period saw a rebound in the business cycle as a form of Economic recovery. We expect 7%-8% growth in industrial output for the fiscal ending March 2011.

RBI has been trying hard to tackle high inflation without disturbing the growth momentum in the economy. With the stubborn inflation numbers witnessed in last few months, we expect RBI to raise the key policy rates by 25 bps each in its upcoming mid-quarter policy review due on March 17, 2011.