Industrial Production (IIP) growth came in at 5.6% Y-o-Y in August, much below consensus expectation of 9.5% and our expectation of 9.0%. One of the predominant factors in driving down growth was a sharp fall in the capital goods index (-2.6% Y-o-Y for Aug vs 72.0% Y-o-Y in July). Meanwhile, the IIP growth number for July was revised upwards to 15.2% Y-o-Y against 13.8% Y-o-Y reported earlier.
Amongst other components, the consumer non durables sector continued to be weak, although durable goods growth remains strong. Intermediate goods, which generally lead the headline index by 2-4 months and has been on a moderating trend, inched slightly higher to 10.0% Y-o-Y in August. The activity-based classification suggests softening in all three components- manufacturing, mining and electricity. Among industries, metal products and transport equipments showed strong growth while wood products and textiles products showed negative growth.
In our assessment, the momentum in industrial production growth is moderating, after a sharp acceleration in the early months of FY11. The softening in PMI and exports growth in recent months along with unfavourable base effect in some of the months suggest that incoming IIP numbers will be on the softer side.
n Yet another month of lumpiness in capital goods
Capital goods continued to be the swing factor for the headline growth, despite its relatively lower weight (9.3%) in the overall index. The sharp movements in capital goods growth observed over the past 3-4 readings continued in August as well, declining 2.6% Y-o-Y in August compared to growth of 72% Y-o-Y in July. These sharp movements in the IIP growth in last 2-3 months have increased the uncertainty regarding the underlying trend in the industrial production.
n Weakness in consumer non durables continues
Consumer non durables segment, with significant weight in the headline index (23.3%), continued to exhibit sluggish trend such that the growth rate turned negative (-1.2% Y-o-Y) in August, first time since January 2010. One of the possible reasons for this sluggishness in non durables category could be emergence of high inflation early in the recovery cycle. With inflation expected to ease in the coming months, this component is likely to inch higher. Meanwhile, the durable goods growth at 26.5% Y-o-Y in August continued to exhibit strong momentum.
n RBI in wait-and-watch mode
The RBI hiked the repo rate by 25bps and reverse repo rate by 50bps in its mid-quarter review in September. While the hikes were a bit aggressive than we expected, the accompanying statement was much softer compared with the July policy meet. The central bank acknowledged that the monetary situation is close to normal. This suggests that policy rates have reached close to the level that is neither restrictive nor accommodative for the economy. Accordingly, RBI is adopting a wait-and-watch stance in our view, where it will monitor not only the incoming economic data, particularly inflation, but also some of the global indicators.
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