Industrial Production August 2013 - Cautious interpretation - ElaraCapital

Factory output data for August-2013 was largely a repeat of previous month in terms of movements in ex-capital goods (1.0%/ 0.8% m-o-m), pointing to an overall stagnation in industrial activity. Actually, the spike of last month was itself led by capital goods (refer to Ominously similar script, dated September 13, 2013) and was not worth mentioning. In addition, the wide range of street estimates for the current release (0.1-4.8%) signals significant misinterpretation of the evolving data trends while also underlying an inherent data volatility that remains largely unexplained.

Sequential momentum, as measured by 3mma saar at 7.8% compared to 6.4% in the previous month, also signals weak recovery trends. In this background, the context of monetary policy formulations has not changed. We believe these nascent recovery trends, if they are one after all, will not deflect the monetary policy to shy away from renewed inflationary pressures in the system.

We would watch inflation data (both WPI and CPI due on Monday) for future policy moves. In our base case, we retain our stance that CB will hike the repo rate by 50bp in the next policy due on October 29.

Details of the data

- Within the double-digit classification of the manufacturing sector, 14 of the 22 sub-sectors have shown an expansion over August 2013. However, some prominent drags that drove the overall index weak include food (-5.3% YoY), base metals (-4.1% YoY), fabricated metals (-7.3% YoY), machinery equipment (15.5% YoY), and furniture (21.6% YoY).

- Revisions for July 2013 have been small, primarily in basic goods (~20bp), intermediate goods (~70bp) and consumer goods (~40bp), leaving overall index growth revised upwards by ~20bp from 2.3% YoY to 2.5% YoY.

Inflation and monetary policy preview

Inflation data due on Monday (WPI estimate: 6.3% and CPI estimate. 9.6%) will decide the immediate course of policy. There is a strong belief among policymakers and a section of street that a strong farm output, owing to good Monsoon, should ease food inflation. We are skeptical as there is little historical evidence to support this. Inflation in India (both CPI and WPI) would be trending upwards over the next 3-4 months and that should lead to elevated rates in the system, given the fresh impetus to inflation management (biased towards CPI) in the monetary policy framework.

Recalibration of the monetary policy will largely follow recommendations of the committee on operating framework of monetary policy, widely expected to be more forthcoming on positioning CPI in policy communications even as initial communications from the governor has already put the CPI into the front seat.

Source : Equity Bulls

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