India's April industrial production unexpectedly firm at 4.1%


As inflation held near steady.

According to DBS, data out late Friday was encouraging as Apr industrial production was surprisingly firm at 4.1% YoY from revised 2.5% in Mar, while inflation held near steady at 5% in May from Apr’s 4.9%. Under the hood, however, price pressures are gradually building up while consumer goods production stagnate. 

May CPI inflation rose 5% YoY in line with consensus and from Apr’s 4.9%. Base effects have kept headline readings subdued, with a gradual build-up in price pressures more evident on month-on-month basis, up 0.7% in May from 1Q’s average 0.2%. 

Here's more from DBS:

Bulk of this upmove was driven by higher food inflation. Again, this is not evident on YoY terms, which was soft at 5.1% (vs Apr’s 5.4%), but up at the fastest pace in nine months on sequential terms. Impact of below-normal winter harvests are gradually feeding through as pulses rose 16.6% YoY in May from 1Q’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. Wary of a sharp increase in food prices, pre-emptive steps have been taken. 

Duty concessions on lentil imports have been extended and imports increased, along with plans to dip into the price stabilization fund to contain prices of essential items. Food grain procurement by government agencies have also been increased despite a fall in production. 

In addition, the fuel price index continued to rise after bottoming out in Feb15, as increase in retail fuel prices and marginally weak rupee bite. In the near-term, base effects will keep readings weak until Aug and rise to 6% by Jan16. Likelihood of deficient monsoon rains has added to the headwinds, with inflationaryexpectations off lows by Mar15 (India: weak monsoon a risk; 08 Jun15). Mindful of these risks, we expect the central bank to keep rates on hold until end-2015.

Out concurrently, industrial production (IP) surprised at 4.1% YoY in Apr (consensus 1.5%, DBSf: 1.8%) from revised 2.5% in Mar. Headline IP has risen in eleven of the past 12 months, validating expectations that the downturn has been arrested and output is likely to improve on restocking needs and rise in demand. 

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