India Macro: May Industrial Output Slows Below Expectations to 5.6% Citi

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India Macro Flash
 May Industrial Output Slows Below Expectations to 5.6%
 Data Surprises in India as well — Following recent global data surprises with US
NFP coming in at 18K v/s expectations of 105k, Chinese CPI at 6.4% v/s 6.2%, and
Malaysia’s IP at -5.1% v/s estimates of -2.7%, India’s May factory output came in lower
at 5.6% (Citi : 8%, Consensus 8.5%, and  8.5% last May). On a MoM seasonally
adjusted basis, production was down 1.7% vs. -2.7% last month. Growth during AprilMay averaged 5.7% v/s 10.8% in the same period last year.  A key point to note is that
volatility in the IIP has been continuing for a while, with the RBI Governor remarking at
a recent conference that this statistic is ‘analytically bewildering’ making it vital ‘to
determine whether the root cause of such behavior is the production decisions in the
wake of uncertainty or whether it is due to the compilation process’.
 May data - Key takeaways —
–  Sectoral Trends:  (1) Manufacturing rose 5.6% with medical/optical instruments,
office/accounting/computer machinery, motor vehicles  and  food products being the
key growth drivers while textiles, electrical machinery, wood and leather were in the
red (see p. 2); (2) Electricity rose 10.3% (3) mining was up a  mere 1.4% reflecting
the impact of environmental clearances and transportation bottlenecks.
–  Use-based classification, (1) Intermediate goods saw a sharp slow down to 0.9%
while basic goods led by steel were up 7.2%. (2) Trends in capital goods continued
their roller coaster ride up 5.6% but on  a 3mma basis trends indicate a sharp
deceleration averaging 6.7% during the last few months v/s the 22% levels seen
earlier. (3) Consumer goods were up 5.4% led by non-durables (+5.6%) while
growth in durables continued to decelerate to 5.2% from double-digit levels earlier.
 Outlook: Soft Patch or Slowdown? —Weak June PMI, subdued auto sales, moderating
credit demand etc. are concerning. However, trends appear to be more reflective of a soft
patch as on the domestic front incremental policy momentum has been positive. In
addition to fuel price hikes, progress on resolving environment related issues which
began in April has increased. This bodes well for a moderate pick-up towards the later
half of the year. We thus maintain our view that FY12 will be a year of two halves, with
1H GDP in the 7.5-7.8% YoY range and 2H GDP at 8.2-8.5% YoY.  At the global level,
while drags from Japan’s supply disruption are dissipating and commodity prices also
appear to be easing, issues in the EU could be a dampener.
 Monetary Policy Implications — With the WPI likely to remain elevated at 9-9.5% in
the coming months and the RBI re-iterating that inflation is likely to get priority over
growth, we maintain our view of the RBI hiking rates by a further 50bps taking the repo
rate to 8% by Dec11. However, the key is whether the RBI will hike in its July 26
meeting especially in context of the evolving debt issues in Europe. As of now, odds
favor the RBI will continue its focus on domestic inflation and hike by 25bps on July 26