India July industrial output IIP flat

Wednesday8217;s data also provided an insight into the economy8217;s performance in the quarter to end-September. The economy has grown 5.5 percent or less in the last two quarters,a far cry from the 7-8 percent growth seen in the preceding period.

But inflationary worries mean the central bank has resisted lowering interest rates despite the sharp slowdown.

The Reserve Bank of India is widely expected to leave its key lending rates steady when it reviews its monetary policy on Monday,in sharp contrast to many other G20 central banks that have been easing conditions to support growth.

The data highlights structural weaknesses of the economy,with poor domestic demand amid political gridlock and contracting exports,said Dariusz Kowalczyk,senior strategist at Credit Agricole CIB in Hong Kong.

It may lead to renewed expectations of a rate cut this month,although we believe that the odds still favour the RBI to stay put.

Indian markets showed little reaction after the data. India8217;s 10-year benchmark bond yield fell around 1 basis point to 8.18 percent from levels before the data,trading flat from its previous close.

The rupee held on to its earlier gains after the output data,trading at 55.24/25 versus its 55.34/35 close on Tuesday,while India8217;s benchmark BSE stock index also retained its gains,trading up 0.5 percent.

SLOWDOWN STARTING TO BITE

The latest economic report offers little respite for Prime Minister Singh as he struggles to escape the aftermath of corruption scandals that have undermined his authority to push ahead with bold and politically unpalatable economic reforms.

I don8217;t think the Reserve Bank of India would change its stance going by today8217;s factory output reading,said Rupa Rege Nitsure,chief economist at Bank Of Baroda In Mumbai.

India8217;s problems are primarily structural and require structural solutions.

Underlining the challenges facing the government,HSBC on Wednesday downgraded Indian stocks to underweight from neutral,citing the government8217;s lack of progress in fiscal or structural reform as one factor in its decision.

With the economic slowdown beginning to bite India8217;s middle class,Singh faces the uphill task of reviving the economy before his government faces the polls in a series of state elections starting this year and leading up to a general election in 2014.

Manufacturing,which accounts for the bulk of industrial production and contributes about 15 percent to overall GDP,contracted 0.2 percent in July from a year earlier compared with a contraction of 3.1 percent a month ago.

The sector is battling weak demand in both overseas and domestic markets. Annual merchandise exports have fallen in four of the last five months,while domestic car sales posted their first annual decline in 10 months in August.

With the manufacturing Purchasing Managers8217; Index PMI easing to a nine-month low in August,the outlook for the sector does not look promising.

Capital investment in the economy grew a meagre 0.7 percent in the second quarter of 2012 from a year earlier. Capital goods output,a key investment indicator,shrank an annual 5 percent in July. It has grown only once in the past 11 months.

COMMENTARY

DARIUSZ KOWALCZYK,SENIOR STRATEGIST AT CREDIT AGRICOLE CIB, HONG KONG

The data is very disappointing as it bodes ill for GDP growth in the current quarter. Worse still,it was the second straight month of manufacturing contraction down 0.2 percent YoY.

The data highlights structural weaknesses of the economy,with poor domestic demand amid political gridlock and contracting exports. It may lead to renewed expectations of a rate cut this month,although we believe that odds still favour the RBI to stay put before cutting in Q4.

The data should have a modest negative impact on the INR,equities and lead to some downside for the INR OIS curve.

INDRANIL PAN,CHIEF ECONOMIST,KOTAK MAHINDRA BANK,MUMBAI

Inflation risks are elevated and is likely to lead to the Reserve Bank of India holding back any easing in its key policy rate. We believe today8217;s IIP data is not going to have any influence on the RBI8217;s stance. Moreover,if the U.S. Federal Reserve announces quantitative easing,that will make the RBI more nervous in terms of cutting rates.

RADHIKA RAO,ECONOMIST,FORECAST PTE,SINGAPORE

The headline is slightly below expectations,with signs of broad-based slowdown in the sub-components. Apart from the inherent volatility in the series,the data validates that the highly-weighted manufacturing sector remains under weather and a rebound is unlikely in the absence of efforts to address structural deficiencies. Combination of weak external sector,sluggish investment sentiments and moderating consumption demand will keep overall production activity subdued in the coming months. RBI will be more interested in the inflation outcome due on Friday.

D.K. JOSHI,PRINCIPAL ECONOMIST,CRISIL,MUMBAI

All the indications are of a slowdown if you look at the July number for exports,core index growth,the GDP data,which showed private consumption slowing and investment stagnant. The core sector was a pointer,reflecting slowdown in mining and electricity.

But,from the fiscal side,due to lack of concrete steps and with inflation concerns dominant at least for the near term,the Reserve Bank of India is unlikely to move on rates.

RUPA REGE NITSURE,CHIEF ECONOMIST,BANK OF BARODA,MUMBAI

I don8217;t think the Reserve Bank of India would change its stance going by today8217;s factory output reading. India8217;s problems are primarily structural and require structural solutions.

RAHUL BAJORIA,REGIONAL ECONOMIST,BARCLAYS CAPITAL,SINGAPORE

Today8217;s data is slightly better than last month,but the scenario is still pretty weak and the numbers are not awe inspiring.

The mining sector continues to remain a drag,and will have an impact on electricity generation. Manufacturing is also under pressure,and even for next month8217;s data we see weak numbers on the back of a drop in auto sales and the recent strike at Maruti. So the growth outlook is weak.

The Reserve Bank of India will consider the inflation numbers seriously. If inflation comes in low,and the government takes policy measures like increasing fuel prices,it could be a signal for monetary easing. Global factors like the U.S. Federal Reserve8217;s decisions will also influence the RBI8217;s stance.

A. PRASANNA,ECONOMIST,ICICI SECURITIES PRIMARY DEALERSHIP LTD,MUMBAI

Cannot dismiss the trend in index of industrial production IIP data,there is no doubt about a slowdown,even if you look at high frequency numbers like auto sales. Looks like the next month8217;s IIP number may be quiet bad.

The key criteria for the Reserve Bank of India is to bring down inflation on a sustainable basis,and for the government to bring the fiscal deficit under control. Neither of that has happened,and may not happen at least in the near term. So,in September,we are not seeing any change in rates but I won8217;t rule out for October,purely because the government still has time. If the government shows commitment towards fiscal consolidation,even though inflation is unlikely to come down immediately,we may have to re-assess. But,as of now,there8217;s no compelling reason for the RBI to cut rates.

SHAKTI SATAPATHY,FIXED INCOME STRATEGIST,AK CAPITAL,MUMBAI

The dismal growth is no more a trigger and the same trend is likely to continue in Q2 FY13. The sequential fall in the intermediate and basic goods clearly indicates production slowdown. With consistent global worries and higher domestic inflation,a fast track action from the government is indispensable to regain the investment confidence.

NITESH RANJAN,ECONOMIST,UNION BANK OF INDIA,MUMBAI

Industrial output growth is nearly flat which was consensus as well as our expectation. If we look at various growth indicators in recent months and kind of outlook on these,there appears to be larger negative output gap. That means scope for rate cut to stimulate the economy.

But for upcoming policy review our call is status quo on policy rate as well as CRR. More interesting to look for in review will be RBI8217;s guidance and whether it perceives further downside risks to growth than earlier anticipated.

MARKETS

Indian markets showed little reaction after the data. The 10-year benchmark bond yield fell around 1 basis point to 8.18 percent as of 0533 GMT from levels before the data,trading flat from its previous close.

The rupee held on to its earlier gains after the output data,trading at 55.24/25 versus its 55.44/45 close on Tuesday,while the benchmark BSE stock index also retained its gains,trading up 0.5 percent.

BACKGROUND

8211; Time is running out for India8217;s coalition government to revive slowing economic activity,blamed in part to policy paralysis in New Delhi.

8211; India will have to raise the price of heavily subsidised fuels such as diesel,Oil Minister Jaipal Reddy said on Tuesday,indicating that hikes could be announced within a week. The finance and oil ministries have been lobbying hard for an increase in prices of fuel,warning the cabinet that time was running out to avert a fiscal disaster and a sovereign credit downgrade to junk by global rating agencies.

8211; Car sales fell for the first time in 10 months in August,and motorcycle sales fell for the first time since January 2009,an industry body said,underlining fears of sluggish economic growth in Asia8217;s third-largest economy.

8211; Indian economic growth languished near its slowest in three years in the quarter that ended in June but was slightly better than expected,signaling the worst may be over for Asia8217;s third largest economy and dashing investor hopes of an early rate cut.

8211; The Reserve Bank of India is expected to keep its key interest rate steady this month,a Reuters poll showed,and economists see only a slight easing this calendar year,pointing to hawkish comments from policymakers concerned over high inflation.

8211; Manufacturing sector growth eased to a nine-month low in August as export orders fell for a second month,underscoring the risks to the wider economy from Europe8217;s debt crisis,a business survey last week.

8211; Monsoon rains have splashed back into life,lifting the threat of prolonged drought in the major rice and sugar producer with a second consecutive week of heavier-than-normal showers that could revive yields of summer crops and enable early winter planting.

IIP grows just 0.1 pc in July; India Inc pitches for rate cut

PTI Decline in manufacturing sector growth pulled down the overall industrial expansion to just 0.1 per cent cent in July,prompting India Inc to press for at least 0.50 per cent cut in interest rate by the Reserve Bank in its policy review next week.

Growth in factory output,as measured by the index of industrial production IIP,during the April-July period contracted by 0.1 per cent,official data said.

However,on sequential basis July8217;s growth at 0.1 per cent is an improvement over - 1.8 per cent recorded in June.

The worst performer has been the manufacturing sector,which constitutes over 75 per cent of the index,showing a decline of 0.7 per cent in July,and 0.9 per cent in the

April-July period.

Concerned over the performance of the manufacturing sector,industry chamber Ficci urged the 8220;RBI to cut down interest rates further at least by another 50 basis points

immediately8221;.

Among the different industrial segments,production of capital goods,which refers to the equipment used by industry to produce consumer items,declined by 5 per cent. During the April-July period,the output of the sector contracted by 16.8 per cent.

8220;The economy is in need of sentiment boosters. Investments have dried up8230; It is imperative that non- legislative policy measures are announced at the earliest,

which could help improve confidence levels in the economy,8221; industry chamber CII said.

The Reserve Bank is scheduled to announce its mid- quarterly review of monetary policy on Monday which might contain some steps to boost growth. Finance Minister P Chidambaram,who met heads of PSUs today,has already indicated that steps would be taken to boost investment.

The Department of Economic Affairs Secretary Arvind Mayaram had said yesterday that the government would soon come out with steps to contain fiscal deficit and promote investments as well as GDP growth that had dipped to 9-year low of 6.5 per cent in 2011-12.

Meanwhile,the Commerce and Industry Ministry has called a meeting of central ministries,state government officials as well as industry representatives tomorrow to chalk out the strategy for reviving the manufacturing sector.

The industrial output in July last year was 3.7 per cent,and 6.1 per cent in the April-July period in 2011-12.

Mining sector output dipped by 0.7 per cent in July,as against a growth of 0.7 per cent in the same month a year ago.

Consumer goods production was up 0.7 per cent in July as compared to 6.4 per cent growth in the same month last year.

In all,only 8 of the 22 industry groups in the manufacturing sector showed positive growth in July 2012.

Consumer durables production showed a decline in growth rate as this segment increased by 1.4 per cent in July,compared to 9 per cent in the same month last year.

The consumer non-durables output growth declined to 0.1 per cent in July,as against a growth of 4.1 per cent in the same month last year.

The basic goods production growth slowed to 1.5 per cent in July,compared to 10 per cent a year ago. Power generation too witnessed a dip in growth rate as it declined to 2.8 per cent during July,compared to 13.1 per cent in the same month a year ago.

Experts said,however,it is unlikely that RBI would cut interest rates in the upcoming monetary policy review.

8220;RBI8217;s policy focus is still on inflation. I think it will hold the policy rates steady,8221; Crisil Chief Economist D K Joshi said.