India’s industrial production disappoints with 0.4% YoY

Capital goods output was a factor.

India’s August industrial production (IP) disappointed at 0.4% YoY vs consensus at 2.7% and unchanged from 0.4% (revised) the month before.

According to a research note from DBS, on seasonally adjusted MoM terms, output fell 0.5% from 1.3% in Jul, lower than expectations of over 1% rise.

The key drag on headline IP growth was the -11.3% drop in the capital goods output (Apr-Jul’s 9.3%) together with consumer non-durables slipping back into red.

The capital goods segment is routinely bulky and volatile (see chart), and has distorted headline IP growth in the past.

Excluding this category, IP rose 2.1% in Aug, not far from 2.5% average in the previous four months.

On the use-based end, manufacturing fell 1.4% (Apr-Jul’s 2.4%), while mining output rose 2.6% and electricity generation stayed firm at 12.9% (Apr-Jul’s 11.5%).

Here’s more from DBS:

This data poses downside risks to the September quarter GDP numbers from Jun quarter’s 5.7%.

Manufacturing production has declined -1.2% in Jul-Aug, down from 3.5% in the Jun quarter, but infrastructure related industries like mining and power generation are showing signs of recovery.

As it stands, our aboveconsensus GDP call for FY15 rests on a strong rebound in second half of the year, but a soft patch is likely in the September quarter growth numbers.

This might prick some of the optimism on the domestic reform and revival expectations.

Next, we pan over to today’s CPI inflation and Tue’s WPI inflation releases. September CPI inflation is likely to slow to 7.1% YoY from 7.8% the month before.

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WPI should edge to 3.0% from 3.7% in Aug. Apart from favourable base effects, easing food inflation will be a significant dampener for the headline CPI.

High frequency data show that vegetable prices (average of three widely used varieties) moderated to 8% YoY from 23% in the prior two months.

Imported price pressures have also waned as the impact of the slight rupee depreciation will be more than offset by easing global crude prices.

Brent crude prices dipped to a near two-year low by late-Sep, undershooting the Reserve Bank of India’s (RBI) baseline assumptions for the inflation outlook.

At the same time, service sector prices have eased to sub-6.0% in Aug from 6.7% between Apr-Jul14.

Notably, even as gradual disinflation is underway, the influence of base effects will exaggerate the pace of slowdown until November.