Citi: maintain our 8.4% GDP estimate for FY11

Industrial Production – Data Volatility Continues, August Numbers
Slow to 5.6%, while July is Revised Up to 15.2%
 August Industrial Production significantly lower than expectations — August
industrial production rose 5.6%, lower than our and consensus estimates (Citi
8.0%; Consensus 9.5%). The possibility of lumpiness in capital goods
production appears to be impacting growth, with the numbers coming in the
red in August (-2.6%), while the July capital goods data was revised up to 72%
from 63%. Consequently, headline growth in July was revised up to 15.2%
from 13.8% earlier.
 Data Volatility: Highlights needs to focus on trends — The volatility in data is a
bit of a concern with even the RBI in its policy last month saying ‘high volatility
in industrial production over the last two months does raise doubts about how
effectively the index captures underlying momentum’. Given uneven monthly
trends, focusing on 2-3 months averages is key (the average growth of 8.8%
seen during the last 3 months was in line with expectations). Taking into
account the base effect, we expect industrial growth to come in at the 7%-8%
range in the coming months.
 In addition to uneven trends in Capital Goods, Key Highlights include — 1) On
a sectoral basis growth was led by mining up 7%, manufacturing up 5.9%
while electricity came in at 1%; 2) The volatility in capital goods was reflected
in machinery and equipment which decelerated to 0.4% from 57% last month.
(see page 2 for detailed sectoral break-up); and 3) Apart from the volatility in
cap goods, trends in use-based data were largely unchanged with consumer
goods up 6.9% led by durables up 26.5% while non-durables remained
lackluster (-1.2%). Trends in basic and intermediate goods at 3.7% and 10%
were in line with recent trends.
 Growth and Rate Outlook: Views Unchanged — As discussed in our weekly,
while the recent summer output data provides an upside to agri growth,
volatility in industrial production coupled with anemic trends in electricity
prompts us to maintain our 8.4% GDP estimate for FY11, which factors in
industry growth (value add) at 9%YoY. On rates, while the upcoming Sept data
due on Friday is important (Citi Estimates at 8.6%), given that inflation remains
significantly above trends, we maintain our view of one or possibly two more
hikes in the next 6 months.