Intelligentguess

Situation 

On an annual basis - IIP rose by 3.7% p.a in January’07 compared to January’06,   down from 4.37% p.a in December’07  as compared to December’06.

On a monthly basis - IIP was down by 0.2% in January’07 compared to December’06. IIP rose by 1.2% in December and by 0.3% in November.

Note

The issue of a possible drop in IIP and the reasoning thereof - was discussed in Industrial New Orders growth down in Dec’06 on an annual basis.

Conclusion (click / double click on chart for a clearer visual)

Based on the manner New Orders has been behaving, and the raising of interest rates  towards 3.75% p.a  we cannot expect much growth in IIP in the coming months.

The growth range till Mid’07 is between  5.4% p.a ( perhaps initially) and 2.8% p.a . Growth rates can be expected to drop further after Mid’07 to a 0.00% p.a towards Mid’08. 

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The Economic Times reports that the Indian Government has requested the Reserve Bank of India (RBI) to examine the feasibility of using forex reserves (USD 195 bn at last count) to fund infrastructure projects.

It appears that the decision use a portion of the reserves for infrastructure projects has already been taken and the government is going through the motions of imparting credibility to the whole process by getting a stamp of approval from RBI.

While there is no doubt that infrastructure funding is a priority and all possible sources of funds need to be tapped for this, we better remember that forex reserves are monies that the country ‘owes‘ not ‘owns‘.

RBI would be well advised to proceed on this with caution, remembering fully well that once the ‘reserves’ tap is opened to wet (sic) the government’s needs on infrastructure it would be very difficult to close it.

Locking up reserves in long term projects like infrastructure projects would only leave the country vulnerable in times of financial distress, if ever that were to occur.

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Situation

Prices rose by 1.81% p.a in February 2007 as compared to the same month previous year. ( January had risen at 2.22% p.a) 
Prices were flat as compared to the previous month.

The Bank of Japan raised the uncollateralized overnight call rate from 0.25% to 0.50% on Feb 21 2007 ( with a comment that future rate hikes would depend on growth and consumption)

Conclusion ( click / double click on chart for a clearer visual )

PPI looks like it has further space to drop towards 1.35% p.a ( with a upside possibility of 2.00% p.a)
PPI has a lead effect on the Consumer Price Index (CPI). 

The recent drops in PPI will cause further drops in CPI ( until April ‘07 ) - and - with  possibility of further drops in PPI - could result in CPI remaining low towards June’07.

As such one may not expect immediate raising of interest rates by the Bank Of Japan

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Situation

IIP has grown at 10.9% p.a in January 2007 - as compared to a 15.4% p.a and 11.1% p.a in November and December 2006 respectively

So has growth peaked in November 2006 - and is Indian growth dropping ? However as can be see in the attached picture - Indian IIP growth p.a ( taken from the monthly data) has a very “spiky” growth trend. (Its not seasonally adjusted). It makes more sense to take a 3 /6 / 12 month rolling average to get a true picture

Conclusion ( click / double click on chart for the larger visual)

The 3 month rolling average is on a rising trend - and is looking towards a 13% p.a growth area. This would mean that we would see monthly growth again picking up.

NOTE :  There is an issue regarding the authencity of IIP data and the interpretation of the same. Indian media economists last month  seem pretty convinced that Production had peaked.

Fairval had a good take on this issue last month :

” This stance displays two wrong notions. First the word ‘peaked’. Has someone seen the future here or what? IIP is still in an uptrend, so to use the worked ‘peaked’ is a little out of place here.

Next, we in India have too much tendency to believe official data. Nov IIP data was clearly wrong. The Dec data is more like it. And it is actually quite good.

You can’t use month to month data to analyse whats going on in IIP, becos there is simply too much noise in monthly data. The chart above uses a 12 month rolling average to show whats really going on in IIP. As it shows, the chart is still going up. In fact, the 12 month rolling average is now 9.9%.

It (12 month av) should cross 10% when Jan’07 comes out. date for the first time since mid-90s. If that happens, IIP would have crossed 10% for the first time since Oct’96, or more than 10 years.”

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Situation

Producer Price index ( PPI) remained at a 2.2% growth p.a for the month ending February 2007 ( both December’06 and January ‘07 were at 2.23% p.a)

Conclusion (click/double click on chart for a clearer visual )

• PPI can be expected to range between 1.25% -2.5% until early / mid 2007. Post this drops to 0.50% area towards mid 2008 can be expected.
• Bank of Englands Monetary Policy seems to have suceeded in controling inflation within its inflation target.
• PPI has a “lead” effect on the main measure of inflation the Consumer Price Index ( CPI)

CPI has been dropping since December’06 and with this drop in PPI - it can now be expected to drop further.

The analysis and implications of such a situation can be read in UK - Consumer Price Index ( CPI ) - and its possible effects on the UK Monetary Policy

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