India Insight:Inventory build-up ahead of festive season &base effect boosts IP growth

IP growth accelerates to a five-year high of 9.8%YoY in October

compared to 3.8%YoY in the previous month. This was much above marketexpectation of 7.6%YoY. Considering the volatility in the IP growth series weprefer to look at the three-month moving average (3MMA). On a 3MMA basis,IP growth picked up sharply to 6.6%YoY in October from 4.8%YoY registeredin the previous month.

Manufacturing growth to normalize in the rest of FY16: Despite the stellarperformance seen in IP growth in the month of October, we believe the trendis unlikely to be sustained going forward. We expect monthly IP growth tonormalize in the rest of FY16 as the base effect reverses. This corroboratesour view that the Indian economy will see only a gradual recovery. Alsomanufacturing (industrial production) growth and goods export growth tend tomove in tandem. We believe (a) a slowdown in exports (Why are India’sexports falling?) and (b) sluggish domestic demand led by weak ruralconsumption are among the key reasons for low capacity utilisation in themanufacturing sector, thus delaying capex-led growth recovery.