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Friday, September 12, 2008

Indian Industrial Production Bounces Back As Inflation Continues To Ease

India's industrial output growth bounced back again in July, reaching a five-month high of 7.1% year on year growth. This follows a 5.4 percent gain in June, and 4.1% in May, according to data out today from the Central Statistical Organisation. The result is not entirely unexpected if we look at the very healthy year on year increase in exports registered in July (31.2% year on year), on the back of a much weaker rupee. The important thing now is to be inflation back under tight control as agricultural and crude oil prices drop back.

Indian manufacturing, which accounts for about 80 percent of production, gained 7.5 percent in July from 6.1 percent in June, today's report showed. Electricity output rose 4.5 percent in July from 2.6 percent, mining grew 5 percent and consumer-goods production increased 7.3 percent. Capital goods production rose 21.9 percent in the month, compared with 12.3 percent in June. This suggests that strong underlying investment activity is ongoing.

Inflation Eases Back Again Slightly

Indian wholesale prices rose 12.1 percent in the week to Aug. 30 from a year earlier, making for the third consecutive week in which inflation has nudged down slightly. Prices were up by 12.34% the week earlier, according to the latest data from the commerce ministry.

Still, wholesale prices are still rising at more than double the central bank's targeted 5 percent pace, and have been doing so  since June. So we should expect no easing of the central bank inflation vigilance at this point.

Declining oil and commodity prices are obviously helping cool inflation across Asia and easing pressure on the region's central banks to keep increasing interest rates. Consumer prices in China rose 4.9 percent in August from a year earlier, the smallest gain since June 2007.  Crude has fallen about 30 percent from a record $147.27 a barrel on July 11 as high prices and slowing global economic growth reduced demand for fuels.

Prices of rice, corn, onions, potatoes, spices and edible oils were all down in the week to Aug. 30. Manufactured products price inflation, which has a 64 percent weight in the inflation basket, was up 11.07 percent on the week, down from the 11.28 percent gain in the previous week.

India's Foreign Exchange Reserves Continue To Fall

India's foreign exchange reserves fell again in the week ended 5 September, to $288.8 billion dollars, down $6.5 billion on the previous week, and down $27.36 billion from the May 23 high of $316.2 billion.

As Does The Rupee

The rupee declined gain this week, making it the fifth consecutive week of decline, and the longest losing stretch since May, as global funds shunned emerging-market assets on concern the economic downturn is spreading from the U.S. to Europe and Japan. This is not an entirely logical result in the case of India, as I have been trying to argue. But for the moment, and given the current investor mindset, this is how things are.

The rupee fell to its lowest level in almost two years, and the data show that overseas investors sold more Indian shares than they bought on five of the seven trading days in September. Ironically though the underlying fundamentals - as we are seeing in the industrial output and inflation data may be starting to improve. Falling oil prices will help domestic deflation, and a slightly weaker rupee, and stronger dollar, may well benefit exports.

The rupee was down 2.35 percent on the week to 45.71 to the dollar at the 5 p.m. close in Mumbai on Friday, its lowest level since Oct. 10, 2007.

If we look at the above chart, the deterioration in the value of the rupee against the dollar since the end of July is evident, and this forms part of a global trend. Since India is not a major oil or commodities producer, and since as I say underlying fundamentals (leaving aside the tricky fiscal deficit issue) are more likely to improve than deteriorate, it is not clear what the real justification for this - other than knee-jerking - actually is.

Foreign investors were net sellers of Indian stocks for a fifth straight month in August, and have sold a net $7.6 billion so far this year, according to data from the Securities and Exchange Board of India. They bought a record $19.5 billion in stocks and bonds last year, helping the rupee rally 12.2 percent, the biggest annual advance in more than three decades. The currency has since erased all of those gains.