INDIA PRODUCTION – Growth moderation as desired ::CLSA

Please Share:: India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��


1. INDIA PRODUCTION – Growth
moderation as desired
India’s industrial production (IP) rose a much
weaker-than-expected 5.6% YoY in May following a
downwardly revised outcome of 5.8% (from 6.3%) in
April. The IP data continue to indicate moderation in
industrial activity, as desired by monetary tightening.
However, the widely anticipated favourable effect of
last year’s base on the YoY comparison did not
materialise in May. The IP time series continues to
show too much volatility and revisions, and probably
exaggerates the pace of moderation. For example,
gross direct (+23.9% YoY) and net indirect (+32%)
tax collection in April-June hint of a better tone of
demand than what is indicated by IP. The rise in tax
collection should not be ignored as it has economywide
coverage versus the more limited coverage of IP.
IP fell 2.9% MoM (sa) in May, the second straight
month of decline. While we had forecast a sequential
decline, the actual magnitude was bigger than
expected. Electricity production was the only striking
positive with output up an impressive 10.3% YoY in
May. In contrast, mining output rose only 1.4% YoY.
Growth in capital goods and consumer durables was
uninspiring at 5.9% YoY and 5.2%, respectively,
while intermediate goods grew only 1% YoY.

Growth in IP has been moderating since early 2010
and the latest data are unlikely to materially affect the
RBI’s decision on policy rates on 26 July. That call
will be more affected by the WPI inflation data for
June (CLSA: 9.6% YoY, due 14 July). Given the
delayed and the still incomplete pass through of
higher international crude oil prices to local fuel
prices, headline WPI inflation will remain
uncomfortably high in the 9.5-10.5% YoY for the
next few months before easing later in the year.
Real GDP is expected to ease to 7.5% in 2011-12
from 8.5% in 2010-11. Just as the post-crisis
recovery was uneven, the ongoing deceleration too
is uneven. We maintain our expectation of a 25bp
hike in the repo rate to 7.75% on 26 July as the
RBI will remain focused on checking inflation.
However, as the moderation in growth becomes more
broad based and inflation peaks around August-
September, the RBI is likely to pause once it reaches
8% on the repo rate. Admittedly, significant global
financial dislocation over the next two weeks could
prompt it to hold fire on 26 July.