India's July industrial output eases 3.4% MoM

The slowdown is payback for previous rise.

In line with expectations, India’s July industrial production (IP) slowed to 0.5% YoY (DBSf 0.8%, market 1.9%) easing from 3.4% the month before, while August CPI rose 7.8%, marginally slower than 8.0% the month before.

According to a research note from DBS, the slowdown in the Jul IP to 0.5% was a payback from the firm 4.1% rise in Apr-Jun.

The main drags were capital goods production which dropped 4% (vs. 14% vs. Jun quarter) and weak consumer goods output. On the other hand, electricity generation was firm at 11% while mining output benefited from base effects.

Here’s more from DBS:

Despite the soft Jul performance, we are positive on the outlook. We expect the revival in stalled projects and capital spending interests to boost demand for intermediate, capital, and basic goods.

In addition, after sharp drop in inventories in the Jun quarter, restocking requirements should support the production trend in the coming quarters.

Pickup in discretionary incomes in second half of the year should perk demand for consumer durables.

At the same time, Aug CPI inflation rose by a slower 7.8% on easing non-food factors. The food price index however stayed firm at 9.2% from Jun quarter’s 8.8% on higher fruits, vegetables and dairy product prices.

Non-food segment, on the other hand, pulled back on stable rupee and contained commodity prices.

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More importantly, subdued demand-side pressures led to a sharp slippage in the core inflation indicator to 6.9% from 7.6% in Apr-Jun.

In the Dec quarter, CPI inflation is likely to slow further on positive base effects and moderation in the non-food segments.

High frequency data also point to easing food perishables' prices in Sep, helped by late pick-up in rains.

Therafter, unfavourable base effects could push CPI back above 8% in the Mar15 quarter, but the overall trend will remain close to the central bank's glided disinflationary path.

The Reserve Bank of India (RBI) however is unlikely to shift gears to cut rates anytime soon, as focus shifts to achieving 6% CPI target by Jan16.

We expect the Repo rate to be held unchanged for rest of the year to ensure recovery in growth does not disrupt the disinflationary trend.