06/15/2015
India / GDP
India’s consumer price index inflation held near-steady in May, while industrial production provided an upside surprise.
Indian data released on June 12 were encouraging: April industrial production (IP) was surprisingly firm at 4.1% on-year from March’s revised 2.5%, while inflation held near steady at 5% in May from April’s 4.9%. Under the hood, however, price pressures are gradually building up while consumer goods production stagnates.
May consumer price index inflation rose 5% on-year in line with consensus and up from April’s 4.9%. Base effects have kept headline readings subdued, with a gradual build up in price pressures more evident on a month-on-month basis, up 0.7% in May from the March quarter’s average 0.2%.
The bulk of this move up was driven by higher food inflation. Again, this is not evident in year-on-year terms, soft at 5.1% (versus April’s 5.4%), but was the fastest pace in nine months on sequential terms. The impact of below-normal winter harvests are gradually feeding through as pulses prices rose 16.6% on-year in May from the March quarter’s 10.5%, cereals flatlined, while vegetable/fruit index growth decelerated partly due to base effects. However, prices of vegetables, edible oils and milk have risen in June in anticipation of a deficient monsoon.
The government is wary of a sharp increase in food prices and has taken pre-emptive steps to prevent this. Duty concessions have been extended to lentil imports and imports have been increased, along with plans to dip into the price stabilisation fund to contain the prices of essential items. Food grain procurement by government agencies has also been increased despite a fall in production.
In addition, the fuel price index continued to rise after bottoming out in February, as the pinch is felt from the increase in retail fuel prices and the marginally weak Indian rupee. In the near-term, base effects will keep readings weak until August and rise to 6% by January. The likelihood of deficient monsoon rains has added to the headwinds, with inflationary expectations off lows by March. Mindful of these risks, we expect the central bank to keep rates on hold until end-2015.
Out concurrently, IP surprised at 4.1% on-year in April (consensus expected 1.5%, DBS forecast was 1.8%) from the revised 2.5% in March. Headline IP has risen in 11 of the past 12 months, validating expectations that the downturn has been arrested and that output is likely to improve on restocking needs and a rise in demand.
Sector-wise, electricity generation fell 0.5% and mining activity was lacklustre, but was offset by a 5% rise (versus 2.8% in March) in manufacturing output. On the use-based end, capital goods production continued its strong run, up 11% in April from the March quarter’s 10%, boding well for investment activity. Consumer goods output steadied on the back of higher non-durables output. By contrast, durables output has been steadily on the decline since early-2013, but is likely to find some support from higher real incomes and low inflation even as rural wage growth stagnates. Weak export growth will be an additional drag. Overall, factory output rose 2.8% last fiscal year and is expected to quicken to 4%-5% this year.
