Goldman Sachs: RBI to hike both the reverse repo and repo rates by 25 bp on November 2

India August industrial production: A lower print


The Industrial Production Index (IP) grew 5.6% yoy in August, much lower than the 15.2% yoy (upward
revised from 13.8% yoy) growth in July. The IP reading was significantly below consensus expectations of 9.5%
yoy and our forecast of 9.3% yoy. Sequentially, IP declined 6.7 % mom, s.a. in August after being strong in July.
The lumpy Capital Goods Index fell sharply. The lumpy and volatile Capital Goods Index fell sharply by 41.5%
mom after having risen 64.0% mom in July. On a qoq basis, capital goods remained negative at -0.2% qoq.
Consumer goods rose 0.6% mom after 1.8% mom growth in July, driven by durables goods. Consumer nondurables
remained weak, declining by 1.2% yoy.
The August reading of IP suggests that the big July spike was a blip in the volatile data. It provides another
pointer that domestic demand is not accelerating, although a host of other indicators such as auto sales suggest
demand remains robust. A better-than-expected monsoon will help sustain demand. Our forecast for FY11 GDP
growth is at 8.5% driven by a strong agricultural crop.
We continue to expect the Reserve Bank of India (RBI) to hike both the reverse repo and repo rates by 25
bp on November 2. We think the low IP print should not dissuade the RBI from its primary objective of dealing
with high and persistent inflation, elevated inflationary expectations and rising asset prices. We believe the RBI will
hike policy rates by another 75-100 bp by end-June 2011. WPI inflation numbers for September will be released on
October 14, and we expect it to remain elevated at 8.6% yoy.