India’s industrial output bounced back to 3.4% in April from 0.4% in March. The improvement in headline index of industrial production (IIP) data was largely led by capital goods. Growth in this component surged from -8.5% in March to 2.5% in April.

However, investors should take the buoyancy of this component and the overall data with a liberal dose of salt. Mainly for two reasons.

One, the IIP data itself is very volatile. “We prefer to analyse the data on 3 month moving average (MMA) basis to nullify volatility in the series. On this basis, IIP remains subdued at 1.2% (similar to all 2019 prints) and much lower than the series average of 4%. The worrying aspect is that the breadth with all components is now slowing/contracting on 3MMA basis," Edelweiss Securities Ltd said in a report on 12 June.

Also, as pointed out by Kotak Institutional Equities Ltd, the growth in capital goods and consumer durables segments is surprising given the slowdown in the auto/auto ancillaries’ sector. These sectors contribute to around 30% of capital goods and 40% of consumer durables growth, it said in a report on 13 June.

Secondly, the outlook on industrial production growth is subdued globally and India is unlikely to be an outlier. IHSMarkit’s Global Sector Purchase Manager’s Index (PMI) showed that output growth in the industrial goods sector declined for the fifth successive month in May. What’s more, production of some of the key industrial metals such as copper, steel and aluminum was unimpressive across most regions in May, showed the survey.

In short, given the global trade tussle and liquidity challenges and consumption slowdown domestically, the rise seen in IIP and its sub-components is unlikely to sustain.

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