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India: Volatility in capital goods drags
industrial growth down
Event
India announced industrial production (IP) data for July.
Impact
Monthly IP growth decelerates to lowest since November 2009: IP growth
moderated to 3.3% YoY in July, much below market expectations (consensus
as per Bloomberg survey was 6.2% YoY). This compares with 8.8% YoY
registered in June. Considering the volatility in IP data, we think it is best to
look at the three-month moving average (3MMA) growth trend. On a 3MMA
basis, IP growth decelerated to an average of 6% YoY in July from 6.8% in
the previous month. On the use based classification, volatility in capital goods
dragged the overall industrial production down. Capital goods declined 15.2%
YoY in July after registering a growth of 38.2% YoY in June 2011 partly on
account of a high base effect. Notably, IP growth ex capital goods accelerated
to 6.7% YoY in July from 4.3% in the previous month. (More details on page
2).
Outlook
Growth to soft land over the coming quarters: We expect IP growth to
average 6-7% YoY in FY12 compared to the 8.3% YoY average growth
registered in FY11. Various indicators including auto sales, credit growth,
manufacturing PMI are indicating signs of moderation in the growth trend. In
addition, investments have slowed over the last few months owing to a higher
cost of capital, higher inflation and low investor confidence in lieu of graftrelated
investigations. While export growth so far has been quite strong, we
expect it to moderate in the coming months in view of the global growth
uncertainty. Overall, we expect India’s GDP growth to slow in the coming
quarters. While relatively, the policy tone towards reforms has been
encouraging, a uniform approach to remove the supply-side bottlenecks and
kick-start the investment cycle seems lacking.
Policy outlook: While we believe that interest rates are closer to peak, we
maintain our base case assumption of one more 25bps hike in the policy rate
in the next mid-quarter review of monetary policy on Sept 16th. Incrementally
the policy tone from the government officials is indicating that the RBI should
pause soon. The finance minister Pranab Mukherjee, last week indicated that
he was optimistic that monetary tightening will not be extended. However, the
RBI in the last monetary policy in July clearly indicated that a change in
stance will be motivated by signs of a sustainable downturn in inflation. The
WPI inflation data for August which is due to be announced on Sept 14th will
remain high in our view compared to 9.2% registered in July. Giving weight to
RBI's stance to control inflation at the cost of growth, we believe one more
hike in policy rates seems plausible.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
India: Volatility in capital goods drags
industrial growth down
Event
India announced industrial production (IP) data for July.
Impact
Monthly IP growth decelerates to lowest since November 2009: IP growth
moderated to 3.3% YoY in July, much below market expectations (consensus
as per Bloomberg survey was 6.2% YoY). This compares with 8.8% YoY
registered in June. Considering the volatility in IP data, we think it is best to
look at the three-month moving average (3MMA) growth trend. On a 3MMA
basis, IP growth decelerated to an average of 6% YoY in July from 6.8% in
the previous month. On the use based classification, volatility in capital goods
dragged the overall industrial production down. Capital goods declined 15.2%
YoY in July after registering a growth of 38.2% YoY in June 2011 partly on
account of a high base effect. Notably, IP growth ex capital goods accelerated
to 6.7% YoY in July from 4.3% in the previous month. (More details on page
2).
Outlook
Growth to soft land over the coming quarters: We expect IP growth to
average 6-7% YoY in FY12 compared to the 8.3% YoY average growth
registered in FY11. Various indicators including auto sales, credit growth,
manufacturing PMI are indicating signs of moderation in the growth trend. In
addition, investments have slowed over the last few months owing to a higher
cost of capital, higher inflation and low investor confidence in lieu of graftrelated
investigations. While export growth so far has been quite strong, we
expect it to moderate in the coming months in view of the global growth
uncertainty. Overall, we expect India’s GDP growth to slow in the coming
quarters. While relatively, the policy tone towards reforms has been
encouraging, a uniform approach to remove the supply-side bottlenecks and
kick-start the investment cycle seems lacking.
Policy outlook: While we believe that interest rates are closer to peak, we
maintain our base case assumption of one more 25bps hike in the policy rate
in the next mid-quarter review of monetary policy on Sept 16th. Incrementally
the policy tone from the government officials is indicating that the RBI should
pause soon. The finance minister Pranab Mukherjee, last week indicated that
he was optimistic that monetary tightening will not be extended. However, the
RBI in the last monetary policy in July clearly indicated that a change in
stance will be motivated by signs of a sustainable downturn in inflation. The
WPI inflation data for August which is due to be announced on Sept 14th will
remain high in our view compared to 9.2% registered in July. Giving weight to
RBI's stance to control inflation at the cost of growth, we believe one more
hike in policy rates seems plausible.
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