How do you see the IIP number for May 2022 coming in at a one-year high of 19.6% and will that impact the RBI rate view?

The index of industrial production or IIP remains a key driver of GDP growth. For the month of May 2022 IIP came in at a healthy clip of 19.6%. This also marks the 15th consecutive month of positive IIP growth. Remember that the current IIP growth of 19.6% for May 2022 comes on top of a very strong base of 27.61% in May 2021. One can argue that this is after the massive contraction of May 2020, but the moral of the story is that there is a tendency for the IIP growth to gravitate towards the pre-pandemic levels.

Before we go to the components of the IIP, let us take a quick glance at the IIP revisions. For IIP, there is the first revised estimate after 1 month and the final revised estimate after 3 months. Therefore, with the May IIP, we also got the first revised IIP estimate for April 2022, which was reduced by 40 bps to 6.74%. The final revised estimate for February 2022 was also lowered by 31 bps to 1.11%. Revised estimates are seeing some impact of domestic and global headwinds and that is likely to be the theme for the future months too.

Now for the components of the IIP. Compared to May 2021, the Mining output grew at 10.90%, manufacturing output at 20.63% and Electricity output at 23.47%. What is of real relevance here is the manufacturing growth at 20.63% considering its weightage of 77.63% in the IIP basket. The picture is pleasant even on cumulative basis. For the first 2 months of FY23, mining grew 9.4%, manufacturing 12.8% and electricity at 17.4%. If you look at overall cumulative IIP for FY23 till date, it stands at 12.9%.

Till now, we have seen yoy IIP growth. However, that does not capture the short term momentum in such volatile times. Hence MOM IIP growth can provide the answer. It captures, the short term momentum a lot better. Here is what we find on the MOM high frequency IIP growth in May 2022. Compared to April 2022, growth for mining was +3.36%, manufacturing +2.05% and electricity +2.78%. Overall headline high frequency IIP growth came in at an impressive 2.30%. So, short term momentum is surely favourable.

Let me address the last part of your question; will this data impact the RBI hawkish stance. RBI has shifted focus of monetary policy to inflation control over growth support. At best, this IIP number will only reinforce the view of the RBI that growth is good enough to sustain even amidst higher rates. With IIP growth at 19.6%, RBI will totally obsess with inflation. In short, the RBI would be inclined to believe that with such robust IIP numbers, hawkishness can happen without compromising on industrial growth. The message is clear for the RBI.