Indian Industrial Production Flying High

India’s industrial production rose 17.6% in April, beating market expectations on the upside by nearly 2.5 percentage points. It even came close to putting our own bullish 16% y-o-y number to shame. This reading, along with HSBC’s manufacturing PMI which rose in May, presents a very strong case for the RBI to tighten further and faster. The economy is clearly performing above potential, with capacity hitting constraints due to strong demand. It’s time to hike.

Capital good production, at 73% y-o-y, was the highest since the series began in April 1995. Consumer durables (37% y-o-y in April) has been growing at over 30% since November last year. The breakdown by industries shows that 15 out of the 17 industry groups have shown positive growth over the previous year, ‘Machinery and equipment’ (56%) and ‘metal products and parts’ (41%) have been the clear winners from the boom in infrastructure in the country while ‘wood and wood products’ (-17%) as well as ‘beverages and tobacco’ (-2.7%) are yet to record positive year-onyear growth.

Demand is broadening with private and public sector investment in infrastructure driving growth higher. The pace of growth is only going to pick up hereafter. This means there will be a reversal in the trend slowdown in industrial production seen over the past few months.

There is concern from policy makers about the stability of growth and the possible impact from the debt crisis in peripheral Europe, which are both overdone. We expect the RBI to increase repo rates by 25bps before the next policy meeting on 27 July, altough this will likely occur only after May’s WPI number is published next week.