Royal bank of Scotland Alert | India – Disconnect between sentiment and reality

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At 2.7% yoy, November industrial production data was unusually weak. Though one-off
factors such as festive season induced decline in working days and unfavourable based
effects were at play, the decline was excessive, in our view. In fact, the data was inconsistent
with findings of different corporate surveys and is likely to be revised higher in the coming
months. In any case, it is unlikely to influence the course of monetary policy. We continue to
expect a 25bp increase in the repo rate on 25 January on the basis that inflation
management has superseded growth as a policy objective.

Details: Growth in the manufacturing component of industrial production dropped to 2.3% yoy
(minus 3.7% mom seasonally adjusted). Looking at the details, it appears that the consumer
was responsible for the drop. Consumer durables and non-durables production amounted to
4.3% yoy and minus 6% yoy, respectively.
The moderation in the former follows a rise of 22% yoy (average) in the previous three
months. To an extent, this can be explained by the Deepawali effect. In 2010, the Deepawali
festival was in November instead of October last year. Deepawali festival tends to impact the
number of working days as well as retailer stocking activity. On the other hand, capital goods
production held up well rising 12.3% yoy suggesting that investment activity remains
buoyant.
The problem we have is that the numbers were weak even after considering these one-off
effects. The data is at odds with each of the three major corporate surveys: (1)
manufacturing PMI; (2) Dun & Bradstreet business sentiment survey and (3) NCAER
business confidence survey. In fact, the last of these showed sentiment in the consumer
industry at its highest level in the post-Lehman period.
Our best guess is that the slowdown in November was exaggerated even if activity in the
sector is normalising. We expect an upward revision to the November data.
Will the data alter the course of monetary policy? We do not think so and expect a 25bp
increase in the repo rate on 25 January. As we have said earlier, inflation management has
superseded growth as a policy priority