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● Year-on-year industrial production growth slowed in April both on
the old (1993/94) and new (2004/05) base years. The former was
below the consensus market expectation as well our own 5.0%
forecast.
● The reason for the downturn was a sharp slowing in consumer
durables and non-durables production, while capital goods output
growth held up surprisingly well. Given India needs to ease
bottlenecks in the economy, this is the right kind of slowdown.
● The Reserve Bank of India remains on course to raise rates again
next week (16 June). After the surprise 50 bp hike in May, we are
looking for a more modest 25 bp increase this time, followed by
two further 25 bp hikes at the end-July and mid-September
meetings. This would take the repo rate up to a peak of 8%.
● The tightening of monetary policy in India is meaningful on
virtually any measure and we believe the economy is only just
beginning to feel the effects. We continue to expect GDP growth
to average a bottom-of-range 7.5% in both 2011/12 and 2012/13.
The change to a new base year (of 2004/05) slightly complicates
the interpretation of this release, as year-on-year industrial
production growth was 4.4% on the old base, and is 6.3% on the
new base. Either way, however, output growth slowed from the
previous month, while we suspect that market consensus of 5.5%
growth was based on the assumption that the change of base would
not influence the series very significantly. The 5% forecast was
certainly made on that premise.
Using the old base, we estimate that production fell a seasonallyadjusted
2.9% on the month, partly reversing the over-sized 4.9%
monthly increase of the previous month. The underlying trend, as
measured by the three month-on-three month annualised increase
actually rose to 13.6% – the strongest since March 2010. As such, we
shouldn’t get too bearish about industrial production at this stage. The
bigger worry right now, as highlighted by the January-March GDP
release, is the services sector – which grew at its slowest rate for
more than six years in calendar 1Q. We also saw the service sector
PMI drop nearly 4 index points to 55.0 in May, well below the 58.2
five-year average. In contrast, the manufacturing PMI held up well.
We expect the Reserve Bank of India to raise rates another 25 bp
next week (16 June). Such a move would take the cumulative
increase in the repo rate to 275 bp, while the effective tightening of
monetary policy has been rather bigger than this given the domestic
liquidity squeeze. Thereafter, we are looking for a further 50 bp of
hikes, taking the repo rate to a peak of 8% in September. Thereafter,
a combination of softening wholesale price inflation (we expect it to
start falling in a meaningful fashion with the September release) and
sizable downside growth surprises should put an end to the tightening.
Indeed we expect the RBI to be the first central bank in Asia to cut
rates, possibly in the first half of calendar 2012.
We are only at the early stages of seeing the impact of monetary
tightening. Our analysis suggests it takes 12-18 months for the full
effects of interest rate hikes to come through to the real economy,
which, in turn, implies that the recent weakness in interest rate
sensitive indicators such as motor vehicle sales, property transactions
and real monetary growth is only just the beginning. Combine this with
the (smallish) negative impact from high oil prices, the sizeable
appreciation of the real exchange rate and weaker external demand
and, in our view, there is a recipe for significantly weaker economic
growth ahead.
Our own forecasts of 7.5% average GDP growth in both 2011/12
and 2012/13 are ½ percentage point below the May consensus
(the latest available) for the current fiscal year, and a full
percentage point lower than the market’s 2012/13 projections. If
we are roughly right, there are likely to be several more rounds of
earnings downgrades to go, helping to explain our still relatively
negative view of the equity market, and more constructive sovereign
bond market stance.
The detail of the industrial release (using the 2004/05 base)
showed only a small fall in year-on-year capital goods production
from 15.4% to 14.5%. Meanwhile, consumer durables production
slowed sharply to 3.8% from 13.9%, with non-durables output down to
2.1% from 9.9%. Given the bottlenecks in the economy, this is the
right sort of slowdown in growth. In other words, one focussed more
on the consumer than on capital spending.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
● Year-on-year industrial production growth slowed in April both on
the old (1993/94) and new (2004/05) base years. The former was
below the consensus market expectation as well our own 5.0%
forecast.
● The reason for the downturn was a sharp slowing in consumer
durables and non-durables production, while capital goods output
growth held up surprisingly well. Given India needs to ease
bottlenecks in the economy, this is the right kind of slowdown.
● The Reserve Bank of India remains on course to raise rates again
next week (16 June). After the surprise 50 bp hike in May, we are
looking for a more modest 25 bp increase this time, followed by
two further 25 bp hikes at the end-July and mid-September
meetings. This would take the repo rate up to a peak of 8%.
● The tightening of monetary policy in India is meaningful on
virtually any measure and we believe the economy is only just
beginning to feel the effects. We continue to expect GDP growth
to average a bottom-of-range 7.5% in both 2011/12 and 2012/13.
The change to a new base year (of 2004/05) slightly complicates
the interpretation of this release, as year-on-year industrial
production growth was 4.4% on the old base, and is 6.3% on the
new base. Either way, however, output growth slowed from the
previous month, while we suspect that market consensus of 5.5%
growth was based on the assumption that the change of base would
not influence the series very significantly. The 5% forecast was
certainly made on that premise.
Using the old base, we estimate that production fell a seasonallyadjusted
2.9% on the month, partly reversing the over-sized 4.9%
monthly increase of the previous month. The underlying trend, as
measured by the three month-on-three month annualised increase
actually rose to 13.6% – the strongest since March 2010. As such, we
shouldn’t get too bearish about industrial production at this stage. The
bigger worry right now, as highlighted by the January-March GDP
release, is the services sector – which grew at its slowest rate for
more than six years in calendar 1Q. We also saw the service sector
PMI drop nearly 4 index points to 55.0 in May, well below the 58.2
five-year average. In contrast, the manufacturing PMI held up well.
We expect the Reserve Bank of India to raise rates another 25 bp
next week (16 June). Such a move would take the cumulative
increase in the repo rate to 275 bp, while the effective tightening of
monetary policy has been rather bigger than this given the domestic
liquidity squeeze. Thereafter, we are looking for a further 50 bp of
hikes, taking the repo rate to a peak of 8% in September. Thereafter,
a combination of softening wholesale price inflation (we expect it to
start falling in a meaningful fashion with the September release) and
sizable downside growth surprises should put an end to the tightening.
Indeed we expect the RBI to be the first central bank in Asia to cut
rates, possibly in the first half of calendar 2012.
We are only at the early stages of seeing the impact of monetary
tightening. Our analysis suggests it takes 12-18 months for the full
effects of interest rate hikes to come through to the real economy,
which, in turn, implies that the recent weakness in interest rate
sensitive indicators such as motor vehicle sales, property transactions
and real monetary growth is only just the beginning. Combine this with
the (smallish) negative impact from high oil prices, the sizeable
appreciation of the real exchange rate and weaker external demand
and, in our view, there is a recipe for significantly weaker economic
growth ahead.
Our own forecasts of 7.5% average GDP growth in both 2011/12
and 2012/13 are ½ percentage point below the May consensus
(the latest available) for the current fiscal year, and a full
percentage point lower than the market’s 2012/13 projections. If
we are roughly right, there are likely to be several more rounds of
earnings downgrades to go, helping to explain our still relatively
negative view of the equity market, and more constructive sovereign
bond market stance.
The detail of the industrial release (using the 2004/05 base)
showed only a small fall in year-on-year capital goods production
from 15.4% to 14.5%. Meanwhile, consumer durables production
slowed sharply to 3.8% from 13.9%, with non-durables output down to
2.1% from 9.9%. Given the bottlenecks in the economy, this is the
right sort of slowdown in growth. In other words, one focussed more
on the consumer than on capital spending.
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