IIP up, but keep your hopes down

It is that time of the season again. The Index of Industrial Production number is out and the Reserve Bank's monetary policy review is due in six days. Will he, won't he?

The point is, why will he? And will he - presumably everyone understands this 'he' is Mint Road's man of conviction who refuses to cut interest rates - do it just because the IIP has jumped to its highest in a year?

This is not to take away from the strong show industry has put up. After hovering around zero - sometimes this side and sometimes that - for a year, the IIP surged to 8.2 per cent in October, about twice as much as forecast in a Reuters poll.

The dampener is that the IIP is prone to sharp swings. Its components are broad - manufacturing, mining and electricity - and the manufacturing sector's strong showing of 9.6 per cent gave the index a strong boost. Given that manufacturing accounts for three quarters of the index, that would be a really strong boost.

Part of it, however, may be because there were more festival holidays, which cause a factory shutdown, in October last year. So, this healthy October number would be against last year's low base.

Still, 8.2 per cent compared to a decline of 0.7 per cent a month back will have enough room for low-base realism as well as high exuberance.

Sadly, inflation is still ahead, with consumer prices clocking a 9.9 per cent increase in November.

Then there is also the minor matter of revisions. The high number in October brings back memories of January. As the government later admitted, its data keepers had calculated sugar production in the first month of 2012 to be more than twice what it actually was (13.4 million tonnes, against the real figure of 5.8 million tonnes). The IIP for that month was later revised from 6.8 per cent to just 1.1 per cent. One hopes there will not be a repeat this time, but the government's data-keeping has faltered more often than it should have.
 
The point is that when Subbarao decides to cut or not cut rates, or cut or not cut the Cash Reserve Ratio, he will be following his beliefs (have supply-side constraints eased, he would wonder), not really the IIP.