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India Equity Research Reports, IPO and Stock News
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• Industrial output decelerated
sharply to 3.3% YoY for July …
• … driven by a slump in capitalgoods
output
• But, with inflation still
elevated, we expect a 25bp
repo-rate hike this week
Summary
India’s industrial output decelerated
due to a contraction in capital-goods
output, which we expect to be
transitory. Consumer-durables
production improved, and we still
expect a hike of 25bps on Friday 16
September.
Fundamentals
India’s industrial output decelerated
sharply for July, rising by just 3.3%
YoY (from 8.8% YoY for June), the
slowest expansion in 21 months.
Manufacturing, which accounts for
76% of industrial production,
decelerated to 2.3% YoY growth for
July from 10.3% YoY for June.
Electricity production expanded by
13.1% YoY for July (7.9% YoY for
June), buoying overall industrial
output, with hydro-electric power
receiving a fillip from this year’s
strong monsoon.
India’s industrial cycle has been
driven largely by capital-goods
production since 2003. Capitalgoods
output – representing the ups
and downs of fixed-investment
spending – contracted sharply by
15.2% YoY for July, following a
38.2% YoY surge for June. The
seemingly dramatic turnaround was
largely a reflection of an extremely
high base for the previous July 2010
(when capital-goods output
expanded by 40.7% YoY).
Beyond the volatile capital-goods
segment, a decline in intermediategoods
output contributed to the
softness of industrial output. Basicgoods
production accelerated, for
the fifth consecutive month, to
10.1% YoY for July (7.5% YoY for
June). This was partially offset by a
1.1% YoY contraction in
intermediate-goods production (up
0.6% YoY for June). Consumergoods
production expanded by 6.2%
YoY for July, an improvement from
June (2.3% YoY) but still well below
the 10% YoY growth achieved for
FY10/11. Crucially, consumerdurables
production accelerated to
8.6% YoY for July (from 1.5% YoY
for June). This, coupled with the
likely strength of Services and
Agriculture (and a low base for
Manufacturing output in 2H
FY10/11), should allow real GDP to
rebound in the second half of the
year. We think the prospect of
broader economic strength, amid
still-high inflation, provides the RBI
with enough justification for another
rate hike.
WPI inflation for the week ended 27
August revealed food inflation at
9.6% YoY. This underlines further
the need for continued tightening.
With real interest rates rising (right
chart), we expect industrial
production to trough this quarter.
However, we expect this to be the
last rate hike of this cycle. With
clarity regarding the end of the
monetary-tightening cycle (and
inflation likely to recede from
September onward, in lagged
response to the sharper tightening
in May-July), we expect capex and
industrial production to rebound in
2H FY11/12.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
• Industrial output decelerated
sharply to 3.3% YoY for July …
• … driven by a slump in capitalgoods
output
• But, with inflation still
elevated, we expect a 25bp
repo-rate hike this week
Summary
India’s industrial output decelerated
due to a contraction in capital-goods
output, which we expect to be
transitory. Consumer-durables
production improved, and we still
expect a hike of 25bps on Friday 16
September.
Fundamentals
India’s industrial output decelerated
sharply for July, rising by just 3.3%
YoY (from 8.8% YoY for June), the
slowest expansion in 21 months.
Manufacturing, which accounts for
76% of industrial production,
decelerated to 2.3% YoY growth for
July from 10.3% YoY for June.
Electricity production expanded by
13.1% YoY for July (7.9% YoY for
June), buoying overall industrial
output, with hydro-electric power
receiving a fillip from this year’s
strong monsoon.
India’s industrial cycle has been
driven largely by capital-goods
production since 2003. Capitalgoods
output – representing the ups
and downs of fixed-investment
spending – contracted sharply by
15.2% YoY for July, following a
38.2% YoY surge for June. The
seemingly dramatic turnaround was
largely a reflection of an extremely
high base for the previous July 2010
(when capital-goods output
expanded by 40.7% YoY).
Beyond the volatile capital-goods
segment, a decline in intermediategoods
output contributed to the
softness of industrial output. Basicgoods
production accelerated, for
the fifth consecutive month, to
10.1% YoY for July (7.5% YoY for
June). This was partially offset by a
1.1% YoY contraction in
intermediate-goods production (up
0.6% YoY for June). Consumergoods
production expanded by 6.2%
YoY for July, an improvement from
June (2.3% YoY) but still well below
the 10% YoY growth achieved for
FY10/11. Crucially, consumerdurables
production accelerated to
8.6% YoY for July (from 1.5% YoY
for June). This, coupled with the
likely strength of Services and
Agriculture (and a low base for
Manufacturing output in 2H
FY10/11), should allow real GDP to
rebound in the second half of the
year. We think the prospect of
broader economic strength, amid
still-high inflation, provides the RBI
with enough justification for another
rate hike.
WPI inflation for the week ended 27
August revealed food inflation at
9.6% YoY. This underlines further
the need for continued tightening.
With real interest rates rising (right
chart), we expect industrial
production to trough this quarter.
However, we expect this to be the
last rate hike of this cycle. With
clarity regarding the end of the
monetary-tightening cycle (and
inflation likely to recede from
September onward, in lagged
response to the sharper tightening
in May-July), we expect capex and
industrial production to rebound in
2H FY11/12.
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