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Industrial Production (IIP) grew 4.4% Y-o-Y in September, much below consensus expectation of 6.4% and our expectation of 5.5%. Manufacturing sector growth, at 4.5% in September from 7.5% in August, Y-o-Y, led the softness in the headline number. On the use-based classification, apart from capital goods that showed a sharp fall (from 2.1% in August to -4.2% in September, Y-o-Y), consumer durables was also a big drag (from 27.1% in August to 10.9% in September, Y-o-Y). Meanwhile, IIP growth number for August was revised upwards to 6.9% against 5.5% reported earlier, Y-o-Y.
In our assessment, IIP seems to be showing some moderation, although rapid growth (double-digit) recorded in early months of the year meant that growth in April-September 2010 was at robust 10.2% against 6.3% in the same period last year. Volatility in headline index in recent months, however, has clouded the assessment of the underlying momentum in IIP. Base effect would be favourable in October, but significantly unfavourable through the remaining fiscal, suggesting softer headline numbers during these months. Overall, momentum in IIP in FY11 seems healthy enough to support 8.3-8.4% real GDP growth. Key risks, however, arise from unfavourable trend in exchange rate and exports.
n Capital goods show contraction; basic goods continue to soften
The volatility exhibited by capital goods index in recent months continued in September, with the index contracting -4.2% Y-o-Y (2.1% Y-o-Y in August and 65% Y-o-Y in July). These sharp movements in capital goods index have increased the uncertainty regarding the underlying trend in headline index. Meanwhile, basic goods, which has significant weight in the headline index (35.6%), continued to exhibit softening trend both on Y-o-Y as well as M-o-M SA basis.
n Consumer non durables inched higher; durables weakened
The consumer non durables segment, which had been on a softening trend, surprisingly showed an uptick (2.5% against 0.8% in August, Y-o-Y). With moderating inflation and upward trend observed in sequential data, we expect this category to support the headline index in the coming months. Meanwhile, durables showed a sharp decline (10.9% in September against 27.1% in August, Y-o-Y). We believe that the upside because of the festival season has not yet been reflected in the index and we could see some reversal in durables index October.
n Global cues turning softer
Globally, the trends in manufacturing are generally turning softer. Some export oriented EM economies are seeing softening in PMIs on account of weaker external demand and upward pressure on domestic currencies against the USD and RMB. However, China’s PMI remains stable, despite high dependence on exports, as RMB remains stable against USD and has weakened against Asian FX. India remains somewhere in between, relatively less dependent on exports; in recent months, INR has appreciated less than its Asian peers due to higher current account deficit. However, if upward pressure on INR continues unabated and external demand remains sluggish, India’s industrial production trend may get hurt.
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