<?xml version="1.0" encoding="UTF-8"?><root available-locales="en_US," default-locale="en_US"><static-content language-id="en_US"><![CDATA[After a dismal performance in the previous two months, the industrial growth recovered to 7.1 per cent in July owing to resurgence in capital and consumer durable goods sectors.. Even though industrial growth, as measured by the index of industrial production (IIP), moderated compared with 8.3 per cent a year ago, what was heartening for the economy was that the crucial capital goods production surged by a whopping 21.9 per cent from 12.3 per cent. The improved data is above the market expectations of around six per cent and may provide some respite to the government and RBI, struggling hard to check the double-digit inflation through tight monetary policy which hampers the growth process.
Key Points
Manufacturing production rose 7.5 percent in July from a year earlier.
April-July industrial output rose 5.7 percent from a year earlier.
Commentary
D.K. Joshi, Principal Economist, Crisil, Mumbai
"The momentum is weakening but not to the extent that was visible in the first quarter. If you look at RBI's GDP growth expectation for the year, they are expecting around 8 percent growth, for which industry needs to grow by 7.5 percent. In that sense, industry's expansion is below the RBI's expectation. Still, tightening of monetary policy can happen because of inflation and the consumption expenditure is still strong. The RBI has a multi-parameter approach and will take a call based on a host of indicators. I expect the RBI to raise its repo rate by 25 basis points by October and eventually ease its policy next year."
A. Prasanna, Analyst, Icici Securities, Mumbai
"The number is above expectations and suggests a strong sequential expansion. The capital goods number is a bit of a surprise as it goes against the trend of slowdown in investment activity that we have been witnessing. We need to wait for one or two more readings to discern any change in trend. Overall this number simplifies RBI's job and allows them to continue focusing on containing inflation."
Indranil Pan, Chief Economist, Kotak Mahindra Bank, Mumbai
"Growth of capital goods segment indicates investment demand is strong. This along with the strong growth in M3 money supply indicates there will be more tightening by the RBI (Reserve Bank of India). We expect a 25-basis-point increase in repo rate in October."
Saugata Bhattacharya, Economist, Axis Bank, Mumbai
"There is still some softness, but the number is better than what we had expected. I am told that mining growth and capital goods is high, so we need to first get a feel as to where this is coming from. However, whatever the numbers, there is still an underlying softness, but nevertheless, it is an encouraging trend."
Sonal Varma, Economist, Lehman Brothers, Mumbai
"Today's industrial output report is better than expectations. The sharp surge in capital goods growth is positive, as it suggests that investment activity is ongoing. However, the headwinds to growth have risen and we expect average IIP growth of 6.7 percent in FY09. We do not expect any more repo rate hikes by the Reserve Bank of India."
Market Reaction
The yield on the 10-year benchmark bond fell 2 basis points to 8.25 percent after the data.
The rupee was at 45.7150/7250 per dollar, stronger than 45.76/77 beforehand.
The BSE Sensex trimmed losses and was down 0.7 percent at 14,223.93.
Background
Industrial output growth has slowed from rates above 10 percent in 2006 and the first half of 2007. Geared mostly to the domestic market, it is a key gauge of local demand, and accounts for about a fifth of GDP.
After growing at or above 9 percent for the past three fiscal years, India's economy is slowing. In the June quarter, it grew 7.9 percent from a year earlier, its slowest rate in 3-½ years.
The RBI raised its key lending rate, the repo rate, three times in June and July, taking it to a seven-year high of 9.0 percent to cool inflation. It has also raised banks' reserve requirements to drain cash from the banking system.
The RBI has raised its aim for inflation at the end of the fiscal year in March to close to 7.0 percent from about 5.5 percent.
Related Link
July Industry Output Flags Underlying Strength
(Reuters)