The index of industrial production (IIP) for the month of August was below expectations, at 0.4 percent against 0.5 percent in the month of July. A CNBC-TV18 poll had predicted the number to be around 2.4 percent.
Speaking to CNBC-TV18, Gaurav Kapur, Sr. Economist at RBS says that the August figures are usually lower than July. The capital goods and the manufacturing cut down the confidence of the first quarter, coming in lower-than-expectations. He expects the September consumer price index (CPI) to be 7.4 percent.
The capital goods growth for the month of August stood at -11.3 percent versus -3.8 percent month-on-month. The manufacturing also contracted to -1.4 percent against -1 percent from the previous month.
Rupa Rege Nitsure, chief Economist and GM, Bank of Baroda termed the IIP data as ‘shocking’ result given she expected the industry to grow above 2 percent in August. According to her, the persistent contraction in manufacturing is worrisome. She expects the CPI data (due Monday) to be around 7.3 percent.
Adding to the discussion, Ashutosh Khajuria, President – Treasury, Federal Bank says the bond yields are likely to fall further on Monday on the back of consistent fall in crude oil prices."However, IIP numbers as one factor contributing to yield curve would definitely be positive for bond markets," he adds. Below is verbatim transcript of the discussion:
Q: Industrial growth is a huge disappointment in August coming in at 0.4 percent over a 0.5 percent in July and the big culprit is manufacturing and within manufacturing both capital goods and consumer goods have let us down. So, clearly not much hope in terms of an industrial recovery any time soon. Do you have to rethink perhaps your full year industrial numbers as well?
Kapur: Well, full year, may be not at this stage but certainly this quarter will be lower and especially in manufacturing sector there is a widespread slowdown, the momentum and the confidence which was there in the first quarter that is waning down. The reality is hitting us.
On the capital goods side maybe the point which Rupa was making earlier the fact that non-oil, non-gold imports are actually picking up. So, what you are seeing is an import substitution in case of capital goods but we also know that investment activity has not yet picked up in any meaningful manner and any which ways the recovery in the next couple of quarters in terms of manufacturing sector would be driven more by consumption.
As you get into September or October you would start seeing the stocking effect on consumer goods side where you will see pick up on account of festival season but essentially the underlying trend really seems to be that the sentiment is now weakening or the confidence which was seen in Q1 is waning in Q2 and perhaps waning faster than what I was anticipating clearly.
Q: Credit off-take will only follow industrial growth, it will not lead industrial growth. What are you working with for a full year number at the moment?
Kapur: Full year number for manufacturing sector, I am still working at a number of around 3.5 percent. Second half of the year especially fourth quarter you could see a pick up for a number of reasons.
While monsoons have recovered the food grain cycle production cycle has shifted into Rabi. So that could provide a push to the rural consumption.
With inflation gradually easing and with interest rates also now softening and combined with the fact that commodity prices globally have been coming down, especially oil.
All of these pertain well for some pick up in a cyclical manner over the second half of the year but structurally things are not any different, the data is pointing towards that. Unless you see a meaningful recovery in the investment activity you won’t really see a major improvement in industrial production numbers on a consistent basis.
Q: What are your first thoughts, will this make you rethink the industrial growth numbers for the year?
Nitsure: This is very ugly and shocking but data is quite mixed. On the other hand exports have slowed down, growth has decelerated in the month of August. However, if you look at non-oil, non-gold imports growth then it has firmed up. It is closer to 9 percent and that is very highly correlated with overall economic activity.
Maybe there is some room to believe that overall gross domestic product (GDP) growth for Q2 will be driven more by service sector than manufacturing sector. However, 0.4 percent is very low and shockingly low.
Q: Any guesses on whether this might influence the Reserve Bank of India (RBI) at all or nothing doing?
Nitsure: They have now accepted flexible inflation targeting framework and their focus will continue to remain on anchoring inflationary expectations. Also RBI openly takes this position that one of the reasons for low investment confidence in the country is high input price inflation.
If you see the amount corporates are spending on chemicals, raw materials and energy is on the higher side. So, they will try to improve business environment by controlling inflation and they feel that stimulating economic growth is not the function of monetary policy rather it has to come from the government.
Q: Do you think the bond yields are going to react to this at all? We did have a fairly gung-ho start to the week but the Reserve Bank poured cold water on the bond market’s enthusiasm by sucking out all the money. What might be the reaction on Monday you think?
Khajuria: Yields will fall further; the reason is very simple. There are three important factors that would be influencing bond yields. One is the consistent fall in crude oil prices and more there is a fall in crude oil, in particularly the Indian basket, you have a more credibility of fiscal deficit number coming for. That definitely brings cheers to bond traders. RBI has come out with open market operation (OMO) sales and they have a lot of stock, almost 25 percent of outstanding G-Secs are with them.
So they would look at that. The monetary signals what they are trying to transmit through various policy statements and maintaining status quo should not totally be ignored by the markets and therefore one can expect more of OMO sales coming in if there is a steep fall or a sudden fall in bond yields. However, IIP numbers as one factor contributing to yield curve would definitely be positive for bond markets.
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