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Industrial Growth Revives

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Industrial growth in the country revived moderately to 8.8 per cent in June this year on the back of a smart recovery in the manufacturing sector and better offtake of capital goods.

Growth in factory output, as measured in terms of the Index of Industrial Production (IIP), stood at 7.4 per cent in June last year, as per government data released here.

The benchmark five-year swap rate was up 3 basis points at 6.87 per cent, and the one-year rate rose 4 basis points to 7.67 percent after the data, traders said.

The 10-year benchmark bond remained unchanged at 8.26 percent, while the partially convertible rupee was mostly unmoved at 45.335/337 per dollar.

The 30-share BSE index remained almost flat at 17,051 points.

The data signals a fair amount of resilience in the economy despite tighter policy from the RBI in the past 18 months which also means further RBI policy tightenings later this year is a distinct possibility.

Brian Jackson, senior emerging markets strategist, Royal Bank of Canada, Hong Kong said: "Despite hefty increases in policy rates over the last 18 months, industrial production growth has remained resilient, staying in a range of around 5-10 per cent since the start of the year. This should keep the policy focus firmly on the need to get inflation lower, with July data out next week likely to show headline WPI inflation above 9 percent for another month.

"We also expect that escalated concerns about the external outlook are also unlikely to deter the Reserve Bank of India from further policy tightening in the months ahead, and we continue to forecast another 50 bps of rate hikes by the end of the year."

Anubhuti Sahay, Economist, Standard Chartered Bank, Mumbai said: "Though the headline IIP is significantly higher than expected, such high growth rate in capital goods and thus headline IIP is unlikely to sustain, more so when the consumer sector is on a downtrend.

"Thus, going forward we expect IIP to ease off. However, for the time, being it will strengthen the case for further tightening by the RBI."

IIP In Q1 At 6.8%
During the first quarter (April-June) this fiscal, IIP growth stood at 6.8 per cent, as against 9.6 per cent in the corresponding three-month period last year.

Output of the manufacturing sector, which constitutes over 75 per cent of the index, grew by 10 per cent in June, 2011, compared to 7.9 per cent in the same month last year.

Offtake of capital goods jumped by 37.7 per cent in June, 2011, in comparison to a growth of merely 3.7 per cent in the previous year.

Similarly, electricity production also improved, witnessing a growth of 7.9 per cent during the month under review, as compared to a growth of 3.5 per cent in June, 2010.

However, growth in mining sector output declined to a mere 0.6 per cent in June, 2011, from 6.9 per cent in the same month last year.

Non-durable consumer goods (FMCG) production also saw a slowdown in growth to 2.1 per cent in June, compared to 7.5 per cent expansion a year ago, while growth in consumer durables output also fell sharply to just 1 per cent from 21.2 per cent a year ago.

Meanwhile, the industrial growth number for May this year has been revised upward to 5.9 per cent from the provisional estimate of 5.6 per cent.

Sonal Verma, Economist, Nomura, Mumbai said: "Most of this rebound is because of capital goods. Except capital good there has actually been a slowdown so sustainability of this trend is actually in question.

"Given the headline inflation at above 9 per cent we continue to expect one final 25 basis point rate hike in September."

PMI Stumbles But Exports, Services Sector Growth Zoom
While industrial production grew in June, the same month saw the HSBC Markit Purchasing Managers' Index, an indicator of manufacturing expansion, fell to a 20-month low of 53.6 in July. Exports also surged early 82 per cent in July as demand soared for engineering goods, petroleum products and readymade garments

The services sector on the other hand, expanded at its fastest clip in three months in July, driven by solid expansion of new business in spite of rate hikes and high inflation.

June also saw headline inflation quickening to 9.44 per cent, while food inflation accelerated to 9.9 per cent in end-July, the highest since mid-March.

Car sales in India fell 15.8 per cent in July, the first drop in two-and-half years, as higher interest rates and rising vehicle costs start hitting the vehicle sales. The automobile industry cut car sales growth forecast for the current fiscal year to 10-12 per cent from 16-18 per cent.

India's domestic-demand driven economy grew 7.8 per cent in the quarter through March, its slowest annual pace in five quarters.