India’s industrial production rose 0.1 percent in July from a year earlier, with growth in consumer durables weighed down by a contraction in manufacturing, mining and capital goods purchases, government data showed on Wednesday. Analysts polled by Reuters had expected a rise of 0.3 percent in July output. In June output fell 1.8 percent.
Manufacturing, which constitutes about 76 percent of industrial production, fell an annual 0.2 percent from a year earlier, the federal statistics office said.
In the April-July period, industrial production contracted an annual 0.1 percent.
According to Indranil Pan, chief economist at Kotak Mahindra Bank, “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 today’s IIP data is not going to have any influence on the RBI’s stance. Moreover, if the U.S. Federal Reserve announces quantitative easing, that will make the RBI more nervous in terms of cutting rates.”
Dariusz Kowalczyk, senior strategist at credit agricole, CIB, Hong Kong says “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.”
Radhika Rao, economist at Forecast PTE says, “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.”
DK Joshi, principal economist at Crisil says “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, chief economist at Bank of Baroda agrees. “I don’t think the Reserve Bank of India would change its stance going by today’s factory output reading. India’s problems are primarily structural and require structural solutions.”
Rahul B ajoria, regional economist at Barclays too thinks inflation numbers holds the key to determine RBI’s stance.
“Today’s data is slightly better than last month, but the scenario is still pretty weak and the numbers are not awe inspiring. 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 Reserve’s decisions will also influence the RBI’s stance.”
A Prasanna, economist at ICICI Securities says, “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 month’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 won’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, there’s no compelling reason for the RBI to cut rates.”
Shakti Satapathy, fixed income strategist at AK Capital says, “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.”
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 Sensex also retained its gains, trading up 0.5 percent.