This is why India is finally on the right economic track

Industrial output growth inched higher to 2.7%, but guess what the new inflation is.

According to DBS, after a long time, India‟s growth and inflation data are moving in the right direction. Industrial output growth rose 2.7% y-o-y in August from a downwardly revised -0.2% in July, above expectations.

Here's more from DBS:

A rebound in consumption goods production growth to 5.0% y-o-y from 0.5% in July was the main reason for the upside surprise. This was led by higher production of both consumer durable and non-durables goods.

Capital goods production, a measure of investment demand, continued to contract (-1.7% y-o-y) though at a slower pace than in July (-4.5% y-o-y). Among other components, basic goods output, mainly comprising of the infrastructure sector, also rose at a faster pace (2.8% versus 1.0%).

Overall, industrial output growth averaged 1.4% y-o-y in Q3 (Jul-Aug), better than in Q2 (-0.2%), suggesting that industrial output growth is starting to recover, though it remains at a very low level.

Meanwhile, India‟s CPI inflation (base 2010=100) eased to 9.7% y-o-y in September from 10% in August, better than our expectation of 10.3%. The positive surprise on CPI is mainly due to lower food and fuel prices.

On the latter, the fuel index is up only 0.9% m-o-m, which to us suggests that the diesel price hike of mid-September may not have been incorporated in the index. Food inflation eased to 11.7% y-o-y in September from 12.1% in August, while core CPI (ex-food and fuel) remained unchanged at 8.3% y-o-y.

With the pass-through of diesel price hikes likely to take effect soon, we expect CPI inflation to head back into double digits next month. The upcoming WPI inflation print (on Monday) will be the most important data before the RBI policy meeting on 30 October. We expect WPI inflation to rise to 7.87% y-o-y in September from 7.55% in August (Consensus: 7.7%).