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Even as domestic demand remains weak, retail inflation surged sharply higher, says Nomura Equity Research in its Asian Insights Report
Industrial production (IP) contracted by 1.6% y-o-y in May, belying expectations of a rise, and against +1.9% in April (revised down from 2.3%). Domestic demand remains extremely weak with a particularly sharp slowdown in consumer demand this month. On a seasonally adjusted basis, IP contracted for the third consecutive month by 0.8% m-o-m in May from minus1.8% in April, indicating that the underlying momentum has weakened, according to Nomura in its Asian Insights report.
Even as domestic demand remains weak, retail inflation surged sharply higher. CPI inflation rose to 9.9% y-o-y in June from 9.3% in May, above expectations (Consensus and Nomura: 9.3%). Food inflation rose 11.8% y-o-y in June from 10.8% in May due to a sharp uptick in cereal and vegetables prices (the latter is likely temporary). Apart from the upside surprise from food, core CPI inflation also remained unchanged at 7.8% y-o-y in June, against Nomura’s expectations of a decline, due to a higher momentum in price of services such as education, transport and communication (effect of fuel price hikes) and other miscellaneous services. On a seasonally adjusted basis, Nomura estimates that CPI rose by 1.1% m-o-m in June compared with the previous six-month average of 0.8%, while core CPI rose by 0.8% m-o-m versus 0.5%.
Nomura’s key takeaways:
Supply side problems persist: While electricity output grew at 6.2% y-o-y in May from 4.2% in April, mining contracted for the eighth straight month by 5.7% due to policy problems plaguing the industry.
Consumer demand weakened sharply: Consumer durable output contracted for the sixth straight month on a y-o-y basis reflecting continuing decline in consumer discretionary spending. Growth in consumer non-durables also weakened sharply to 1.7% y-o-y from 12.3%.
Investment demand remains sluggish: Capital goods contracted by 2.7% y-o-y in May worse than 0.1% decline in April.
Intermediate goods output growth—a leading indicator of final demand—also moderated this month to 1.5% y-o-y from 2.6% last month, suggesting that final demand remains weak.
Nomura has long-held the view that a quick growth recovery is unlikely in India and that there will be a prolonged period of bottoming out. Domestic and external demand remains weak and neither monetary nor fiscal policy has the space currently to stimulate demand. Hence, the growth outlook remains dim. Nomura is below consensus on FY14 growth at 5.6% y-o-y (Consensus: 5.9%) and it sees downside risks to its forecast. The steep rise in vegetable prices is likely to be temporary. However, the rise in core inflation momentum suggests that CPI inflation will remain elevated for some more time as the pass-through of administered price takes place. The brokerage continues to expect a status quo at the 30 July policy meeting.
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