>INDIA APRIL 2009 INDSUTRIAL PRODUCTION (GOLDMAN SACHS)

India April industrial production: A higher-than-expected up-tick The Industrial Production Index (IP) rose 1.4% yoy in April versus a (upwardly revised) 0.8% yoy fall in March. The positive IP growth was above the consensus forecast of a 0.1% yoy decline and our expectation of a 0.9% yoy expansion. The monthly momentum (seasonally-adjusted) rose 1.8% mom in April versus a 0.5% mom decline in March (see Exhibit 1).

Both the capital and consumer goods indices showed sequential up-ticks. The Capital Goods Index grew 1.6% mom s.a. versus a 9.1% mom decline in March. This was in line with the Infrastructure Index, which rose 4.3% yoy in April. Production of consumer goods rose 0.8% mom in April versus a decline of 2.9% mom in March. However, on a yearly basis, both the capital and consumer goods indices continued to be in negative territory.

We expect a pickup in activity in 2HFY10. Several large investment plans that were mothballed in part due to election-related uncertainties will likely be put back in place. There are several other reasons which suggest to us that there will be an improvement in investment demand in 2HFY10. Domestic demand indicators such as the Purchasing Manager’s Index, the Infrastructure Index and cement dispatches have shown substantial up-ticks recently. Financial conditions have eased considerably. Historical peak-to-trough declines in the investment cycle suggest a bottoming out in the first half of 2009, and the economy continues to have significant pent-up demand for investment, especially in infrastructure and in affordable housing. Our GDP growth forecast for FY10 is at 5.8% with risks now to the upside.

We think monetary policy easing is at an end. Policy rates have come down aggressively and there is excess liquidity in the system. We expect the INR to appreciate further against the USD as the stable government and relatively resilient domestic demand become key catalysts for foreign inflows, deleveraging pressures easing further and the basic balance of payments turning positive in FY10 due to the trade deficit narrowing. Our USD/INR targets are at 47.3, 46 and 44.7 over 3, 6 and 12-month horizons.