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May industrial output up 2.4% y/y: govt

India's industrial production grew at a higher-than-expected pace.

Written by Agencies | New Delhi | Published: July 12, 2012 11:58:54 am

* Industrial production up 2.4% in May

* Capital goods sector slumps 7.7%.

India’s industrial output picked up more than expected in May,bolstering the case for the central bank,the Reserve Bank of India (RBI) to keep interest rates high at its next policy meeting as a slow start to the monsoon puts pressure on inflation,especially food prices.

Industrial production rose 2.4 percent in May from a year earlier,driven by manufacturing growth,data released on Thursday showed. The number,which was ahead of a poll forecast for an 1.8 percent increase,was the largest growth in output since February.

India’s industrial output data is volatile — the government revised last month’s number to a 0.9 percent contraction after initially coming in flat. But the Index of Industrial Production (IIP) is nevertheless taken as a barometer of economic growth,which fell to 5.3 percent in the quarter up to March,the slowest pace in nine years.

Analysts greeted the number as moderately positive but said the central bank would pay more attention to wholesale price inflation published next week when deciding monetary policy at a July 31 meeting.

Today’s number is better than last month’s but it does not signal that we are in the middle of an upturn,said Sanjay Mathur,head of research and strategy at RBS in Singapore.

Unambiguously,it is a weak number for a domestic demand-driven economy like India. With the Reserve Bank of India looking at fighting inflation,it is likely to hold its rates steady in the July review.

Capital goods,a key investment indicator that has shown growth only once in the past 9 months,slumped 7.7 percent in May.

Prime Minister Manmohan Singh,a veteran economist,took charge of the finance ministry last month vowing to revive the economy’s ‘animal spirit’ by attracting investment and speeding up infrastructure and power projects.

India’s battered stock market and rupee have performed better since Singh took over the ministry,with investors hopeful he can usher in economic reforms and reduce last year’s gaping 5.8 pct fiscal deficit.

India’s benchmark stock index gained 7.5 percent in June compared with a 3.5 percent gain in the MSCI Asia-Pacific ex-Japan index. The rupee has gained 3.5 percent since sinking to a record low of 57.32 against the dollar on June 22.

Markets showed little reaction to the industrial output. As of 11:25 a.m. India time (0555 GMT),the Indian rupee had weakened to 55.66/68 per dollar from around 55.58 before the data,tracking weaker global markets.

Battling stubbornly high price rises,the Reserve Bank of India resisted pressure from banks and businesses to cut its key repo rate from 8 percent last month and may again stick to its guns at its end-of-the month meeting.

India’s Wholesale Price Index,the benchmark inflation indicator,is published on Monday for June. A poll predicted June inflation hitting a 2012 high of 7.62 percent,with lower global oil prices likely to be offset by a large jumps in the cost of potatoes and tomatoes because of delayed rainfall.

Manufacturing,which constitutes nearly 76 percent of industrial output,grew 2.5 percent in May from the year-ago period,Thursday’s data showed.



Today’s factory output number is unlikely to change the stance of the Reserve Bank of India one way or the other. Both global and domestic parameters has largely remained same since its last meeting.

The room to cut rates is limited because the slowdown is supply-driven,and it will not help much to ease policy rates. Implementation of supply-side reform measures are key for inflation-growth trade-off.


May industrial production marks some improvement from month and year ago,though reliability of the series remains in doubt after modest growth in April’s output was revised down to -0.9 percent. Notwithstanding the volatility,we expect elevated input prices and still high borrowing costs to impinge on manufacturing activity in the year,with the latter unlikely to receive a significant boost until investment sentiments and demand conditions recover in a sustained fashion. Policy direction meanwhile will be dictated by June WPI and above 7.0 percent print will squash rate-cut hopes at the end-July review.


Trend is still downwards. April number revision was not expected,but it entrenched the view of a slowing growth for India in the June quarter. Would this affect rates? I doubt it,but June numbers will be crucial for rate deliberation. For now we have not priced in any rate cut.


This is the second straight monthly improvement in the data series. While overall level remains subdued,the direction of changes is positive and gives some hope of growth rebounding in June quarter and beyond from the 9-year low hit in March quarter.

This is modestly positive for the INR,although better growth may delay further rate cuts from the RBI. We expect the INR to edge higher on the data,and the INR OIS to move a bit up as well,especially at the short end,leading to bear-flattening of the curve.


It looks like production momentum is stabilising but consolidating at a very low level which won’t give the central bank a lot of comfort. Also with growth momentum not panning out well,rural consumption will get affected,and at that point it will become difficult for RBI to justify rationality for not cutting rates.

There is a downward risk to our growth projection of 6.7 percent,which was revised in June from 7 percent,if monsoons are not good. We expect RBI to cut rates by another 100 basis points from now until March as growth is weak and core inflation below 5 percent,even though headline inflation will remain sticky.


Today’s number is better than last month’s but it does not signal that we are in the middle of an upturn. Unambiguously,it is a weak number for a domestic demand-driven economy like India. With the Reserve Bank of India looking at fighting inflation,it is likely to hold its rates steady in the July review.


More than the May number,the revision in April number is a bigger problem. It seems growth is weak,but we can be cautiously optimistic. Overall I think the Q1 (April-June) GDP number will be comparable to Q4 (Jan-March),which means that slowing trend is still there,though on isolation the May IIP number may look better.

We hold on to our view that after this number RBI will keep rates unchanged and will wait for headline inflation to come down before cutting rates. I think the April number is an aberration as I don’t think there is a contraction in the economy.


We will have to wait for some more time for a rate cut from the Reserve Bank of India. The first rate cut could only be in the first quarter of 2013,because inflation is likely to remain high for the rest of 2012. Inflation above 7 percent is very uncomfortable for the RBI. Monday’s inflation print will be closely watched.

But we will need to keep a close eye on the reforms being initiated by the government.


Industrial growth is still very sluggish and the April revision suggests that there is a prospect of downward revision in May number as well. The first half (April-September) looks pretty grim at 2-3 percent IIP growth at best and second half may see some better IIP number on base effect.

Even sequentially,industrial output is below trend for last four months. But with RBI saying that inflation is high despite economy operating at below potential growth and given what they articulated in the last policy,it is unlikely that RBI will be influenced by a lower IIP number. I think RBI will keep rates on hold until July,if not until September as headline inflation will be on an uptrend until then.


Growth figure for IIP at 2.4 percent is still dismal and strongly reflects the weaknesses in investment cycle. Unfortunately inflation is too high to expect the RBI to reduce the policy rates. Investors are keenly awaiting investment boosting measures from the North Block.


The growth in intermediate goods,both year-on-year and on a sequential basis might have led to a softer recovery in the production activities. However,the monsoon sluggishness is expected to keep the growth activities subdued until August.

What is quite worrying is the April revised data reiterated the slowdown impact on the economy and calls for a fast track action from the central government to cheer up the investment flows. The 10-year new G-Sec saw a 1 basis point down move post data announcement in anticipation of a rate cut from the RBI given the downward revision in the previous month’s output data. However,the WPI data would be the key determinant to take a comprehensive decion while framing the July 31 policy.


This is extremely subdued growth and can at best translate into a GDP growth of 6 percent given the slowdown in agriculture as well.

Food inflation is still at elevated levels and there is little expectations that it will come out because of monsoon. It is more of a structural issue.


The benchmark 10-year bond yield edged down 1 basis point to 8.12 percent following the data.

The partially convertible rupee briefly gained to the day’s high of 55.53 per dollar before again weakening on the day. The 30-share BSE index,which was down more than 1 percent beforehand,was unmoved.


– India’s economy expanded 5.3 percent in the March quarter,its slowest pace in nine years,on a combination of mounting global uncertainties,muddled policies,high inflation and steep interest rates at home.

– Factories stepped up production and hired workers in June at the fastest rate in more than two years,a business survey showed.

– Car sales in June grew 8.3 percent from a year earlier,but were the lowest in numbers since October last year,forcing the auto industry to lower the sales target for the current fiscal year.

– Headline inflation accelerated in May to 7.55 percent as both food and fuel prices picked up. Consumer price inflation,which is an indicator of retail price rises,was unchanged at 10.36 percent in May.

– The monsoon advanced into the main grain producing states of Punjab and Haryana and rains have picked up in soybean areas of central India,marking some progress after last week’s halt. Inadequate rainfall hits farm productivity and pushes up food prices.

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