Volatile capital goods drives factory output, cheaper veggies drag down CPI

Reserve Bank unlikely to act till there is proof that prices will sustain at lower levels

The clamour for a cut in interest rates will only increase with consumer prices falling to 5.52 per cent in October, from the 6.5 per cent seen in the previous month. This improvement in inflation was expected, as the corresponding period in the previous year had seen a sharp spike in vegetable prices. In October, vegetable prices have gone into the negative territory at -1.45 per cent.

The decline in inflation has also been driven by a bigger decline in rural prices, which have declined to 5.52 per cent from 6.68 per cent in the previous month. Economists believe the fall in retail prices is along expected lines as the base effect is expected to remain strong until November. Once the base effect wears off, retail inflation is expected to pick up from January onwards. Dhananjay Sinha, head of institutional research at Emkay Global, expects Reserve Bank of India to hold on rates till there is evidence that the CPI (consumer price index) will sustain below five per cent levels in the months to come.

The industrial production data too has been better than expected. In September, industrial output has grown at 2.5 per cent against a growth of 0.5 per cent seen in August. September's industrial output growth has been largely driven by a 2.5 per cent growth in manufacturing, which had contracted by 1.4 per cent in August. The surprise element comes from the volatile capital goods segment, which has grown by 11.6 per cent in the month. Interestingly, intermediate goods segment has grown by 1.8 per cent only. The volatility in capital goods tends to skew monthly data. Given that the country's power and infrastructure sectors are struggling, the sharp growth in capital goods is surprising.

The numbers don't add up even when it comes to consumer goods. While consumer durables contracted by 11.3 per cent during the months, colour television segment has grown by 47.2 per cent. The production of stainless steel and alloys has grown at 78.5 per cent while HR sheets have grown by 212 per cent during the month. Economists believe that the second half of the year may see industrial output average at 2.5 per cent, with downside risks. Given that growth is slowing in China and Europe, India is unlikely to see a sharp uptick in growth.