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Economy
Industrial Production
Capital goods volatility plays spoilsport. July IIP came in at 3.3%, even lower than
our below-consensus estimate of 5.3% (consensus was at 6.2%). Much of the fall can
be attributed to the capital goods production growth which contracted in July after
increasing by 38.2% in June. The June index was revised slightly upwards to 8.9% from
8.8%. Manufacturing growth was extremely weak at 2.3%. Stripping the IIP of the
capital goods volatility, industrial production growth seems much more stable although
slightly muted at 5.5% against June growth of 3.7%.
Manufacturing growth weakens again
After registering a double-digit growth in June (10.3%), manufacturing growth weakened to
2.3%, the lowest since October 2010. The internals on the other hand do not suggest a broadbased
slowdown since only seven out of the 22 components contracted on a yoy basis. Key
components like ‘basic metals’ (18.9%), ‘motor vehicles, trailers and semi-trailers’ (10.3%), ‘food
products and beverages’ (14.4%), etc. showed steady growth in July. Contraction was visible in
some important sectors like ‘chemicals and chemical products’ (1.3%), ‘machinery and equipment’
(3.1%) and ‘textiles’ (5.6%). Mining growth continued to be weak at 2.8%, up from (-)1.1% in
June. Electricity production, in line with the core sectors production data release, came in at
13.1%.
Capital goods continue to remain volatile; consumer durables production spikes
As we noted in our comment on the June IIP release, capital goods tend to spike on the quarterending
months and then drop in the subsequent month. Thus, the fall in the capital goods
production was not a surprise though we underestimated the magnitude, especially in light of the
large base of the previous year. Capital goods production contracted by 15.2% in July ((-)24.6%
mom). Intermediate goods production was also weak at (-)1.1% and points to a likely further
weakening in production going forward. The consumer durables sector, after registering a quarter
of weak numbers, reversed the trend as it grew by 8.6% in July. Much of this increase was helped
by base effects as mom increase was 7.9% in July 2011 compared to 0.8% in July 2010.
Passenger car production in July increased by about 10% on an mom basis and was probably
responsible for pushing up the consumer durables index. However, going forward, this is unlikely
to sustain as August production was lower than July. Consumer non-durables production also
expanded at 4.1% yoy. Basic goods production remained strong at 10%, up from 7.5% in June.
RBI unlikely to be perturbed by weak headline IIP; inflation will continue to be in focus
While data prints such as the IIP remain important for the RBI, this weak headline WPI might not
have a too significant bearing for the RBI’s monetary policy stance on September 16. This is
because IIP trends remain on a steady path without considering the volatile capital goods numbers.
Further, inflation continues to be a bigger worry considering that it is likely to be announced at
around 9.8% levels for August (data release on September 14). Even RBI’s estimate of 7% for
headline WPI inflation by end-FY2012E remains above the threshold level of inflation of around
6%. On the other hand, continuing high inflation in itself could be damaging for the economy and
hence, RBI would be extremely wary of letting high inflation levels continue. To an extent demand
compression is seen but RBI is expected to stay cautious as global commodity prices have failed to
cool off as envisaged and the Indian Rupee has also depreciated lately. Thus, we keep our research
bet intact for a 25 bps increase in the repo rate to signal RBI’s anti-inflationary stance as growth is
envisaged not to crumble below the potential levels of a broad 7.5-7.7%. Further, July IIP-ex
capital goods production is at 5.5% which is higher than the June outturn of 3.7%. However, we
expect that given the sharp deterioration in global financial markets, RBI might be willing to pause
after it has hiked the repo rate to 8.25%.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Economy
Industrial Production
Capital goods volatility plays spoilsport. July IIP came in at 3.3%, even lower than
our below-consensus estimate of 5.3% (consensus was at 6.2%). Much of the fall can
be attributed to the capital goods production growth which contracted in July after
increasing by 38.2% in June. The June index was revised slightly upwards to 8.9% from
8.8%. Manufacturing growth was extremely weak at 2.3%. Stripping the IIP of the
capital goods volatility, industrial production growth seems much more stable although
slightly muted at 5.5% against June growth of 3.7%.
Manufacturing growth weakens again
After registering a double-digit growth in June (10.3%), manufacturing growth weakened to
2.3%, the lowest since October 2010. The internals on the other hand do not suggest a broadbased
slowdown since only seven out of the 22 components contracted on a yoy basis. Key
components like ‘basic metals’ (18.9%), ‘motor vehicles, trailers and semi-trailers’ (10.3%), ‘food
products and beverages’ (14.4%), etc. showed steady growth in July. Contraction was visible in
some important sectors like ‘chemicals and chemical products’ (1.3%), ‘machinery and equipment’
(3.1%) and ‘textiles’ (5.6%). Mining growth continued to be weak at 2.8%, up from (-)1.1% in
June. Electricity production, in line with the core sectors production data release, came in at
13.1%.
Capital goods continue to remain volatile; consumer durables production spikes
As we noted in our comment on the June IIP release, capital goods tend to spike on the quarterending
months and then drop in the subsequent month. Thus, the fall in the capital goods
production was not a surprise though we underestimated the magnitude, especially in light of the
large base of the previous year. Capital goods production contracted by 15.2% in July ((-)24.6%
mom). Intermediate goods production was also weak at (-)1.1% and points to a likely further
weakening in production going forward. The consumer durables sector, after registering a quarter
of weak numbers, reversed the trend as it grew by 8.6% in July. Much of this increase was helped
by base effects as mom increase was 7.9% in July 2011 compared to 0.8% in July 2010.
Passenger car production in July increased by about 10% on an mom basis and was probably
responsible for pushing up the consumer durables index. However, going forward, this is unlikely
to sustain as August production was lower than July. Consumer non-durables production also
expanded at 4.1% yoy. Basic goods production remained strong at 10%, up from 7.5% in June.
RBI unlikely to be perturbed by weak headline IIP; inflation will continue to be in focus
While data prints such as the IIP remain important for the RBI, this weak headline WPI might not
have a too significant bearing for the RBI’s monetary policy stance on September 16. This is
because IIP trends remain on a steady path without considering the volatile capital goods numbers.
Further, inflation continues to be a bigger worry considering that it is likely to be announced at
around 9.8% levels for August (data release on September 14). Even RBI’s estimate of 7% for
headline WPI inflation by end-FY2012E remains above the threshold level of inflation of around
6%. On the other hand, continuing high inflation in itself could be damaging for the economy and
hence, RBI would be extremely wary of letting high inflation levels continue. To an extent demand
compression is seen but RBI is expected to stay cautious as global commodity prices have failed to
cool off as envisaged and the Indian Rupee has also depreciated lately. Thus, we keep our research
bet intact for a 25 bps increase in the repo rate to signal RBI’s anti-inflationary stance as growth is
envisaged not to crumble below the potential levels of a broad 7.5-7.7%. Further, July IIP-ex
capital goods production is at 5.5% which is higher than the June outturn of 3.7%. However, we
expect that given the sharp deterioration in global financial markets, RBI might be willing to pause
after it has hiked the repo rate to 8.25%.
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