JPMorgan Indian Investment Trust plc
January 2010
Rukhshad Shroff, CFARajendra Nair, CFA
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Two consecutive, outlier years
Positive Years: 22 (73%) 2004 13
Negative Years: 8 (27%) 2002 4
1997 19
2001 -18 1994 17 2007 47
2000 -21 1993 29 2006 47
1998 -16 1989 17 2005 42 2009 80
1996 -1 1984 7 1992 37 2003 73
1995 -21 1983 7 1990 35 1999 64
1987 -16 1982 4 1988 51 1991 82
2008 -52 1986 -1 1980 25 1981 54 1985 94
Year % Year % Year % Year % Year %
-30 to -60 -30 to 0 0 to 30 30 to 60 >60
Range of returns (%)
Source: MOSL, 11/1/10
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JPMorgan Indian Investment TrustCumulative performance to 30th September 2009
* Includes the return from the bonus of subscription shares in November 2008Source: Morningstar, JPMAM. Total returns in £.
1 Year 3 Years 5 Years 10 Years% % % %
JPM Indian – Diluted NAV 28.7 35.5 205.7 350.0
JPM Indian – Undiluted NAV 37.5 44.8 226.6 380.8
JPM Indian – Return to Shareholders 45.1* 34.5 198.0 490.1
MSCI India Index# 47.1 56.6 238.7 255.6
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JPMorgan Indian Investment TrustPerformance update
^ Inception: 1/7/94* Undiluted. Excludes the impact of any subscription share dilutionSource: Morningstar, JPMAM. Total returns in £.
Since Inception^6 months 1 Year 3 Years 5 Years 10 Years Annualised
% % % % % %
JPM Indian – NAV* 25.2 59.2 36.0 186.5 260.9 9.9
MSCI India Index# 31.4 80.6 50.5 206.7 235.7 7.6
Relative performance -6.2 -21.4 -14.5 -20.2 25.2 2.3
Fund Size £462.3m
As at 31st December 2009
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JPMorgan Indian Investment TrustCumulative performance since launch
Source: Bloomberg, JPMAM, Thomson Reuters Datastream
As at 31st December 2009
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JPMorgan Indian Investment TrustTop ten holdings
Stock Name Sector Market Cap £m % of Fund
1 Reliance Industries Energy 47,691 12.0
2 Infosys Technologies Information Technology 19,836 10.8
3 HDFC Bank Financials 9,666 6.7
4 Housing Development Finance Corp. Financials 10,136 6.7
5 ICICI Bank Financials 12,993 6.0
6 Bharat Heavy Electricals Industrials 15,655 4.9
7 Tata Consultancy Services Information Technology 19,540 3.5
8 Tata Motors Industrials 2,660 2.8
9 Maruti Suzuki India Consumer Discretionary 5,998 2.7
10 Infrastructure Development Finance Financials 12,603 2.7
58.82
Source: JPMAM
As at 31st December 2009
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JPMorgan Indian Investment TrustSector weighting
Source: JPMAM
As at 31st December 2009
5.6%
12.4%
3.9%2.6%
4.6%
14.2%
1.0%
30.1%
15.8%
9.8%
Financials
Energy
Information Technology
Industrials
Materials
Consumer Discretionary
Utilities
Health Care
Consumer Staples
Cash
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Big picture view
We think the Indian economy can double in 5-6 years time to ~US$2 trillion.
The share of investment, historically neglected, will increase as India finally takes infrastructure seriously.
Consumption will continue to grow and remain dominant, driven by favourable demographics.
Corporate earnings could double in ~4-5 years
Foreign investment + re-allocation of domestic savings pool = positive for equities
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India remains a compelling early stage growth opportunity
Source: IMF, Morgan Stanley Research, 7/1/10
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Reaping the demographic ‘dividend’
Source: NCAER; E= NCAER estimates, 7/1/10
Growing Middle Class (% Share of Households)
* Note: Africa includes a group of 56 countries. Source: UN, Morgan Stanley Research, 7/1/10
India the Largest Contributor to Growth in the Working Population Over the Next 10 YearsAddition to working age
population by 2019Stock
Position 2009E4457 568765 388 379 963 14521082
500
534159
13854
5133
3212
-8-18
In Millions
F2002 F2006E F2010E
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Positive demographics = growing savings pool = sustainable growth
Source: CEIC, IMF, Morgan Stanley Research, 20/1/10Source: CEIC, CSO, Morgan Stanley Research, 20/1/10
Savings as % of GDP, 2008
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Low penetration will drive consumption
Source: IIFL,15/1/10
Source: Bloomberg, CEIC, Government Statistics Departments, 7/1/10
Domestic Two Wheeler Volumes % of Population Owning Two Wheelers
Auto Penetration (vehicles per thousand) versus GDP per Capita (PPP adjusted)
Source: IIFL,15/1/10
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...while rising infrastructure spending will be another pillar of growth
E = Morgan Stanley Research estimates;Source: Morgan Stanley Research, 14/1/10
E = Morgan Stanley Research estimates;Source: Morgan Stanley Research, 14/1/10
India: Infrastructure InvestmentIndia: Infrastructure Investment
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Infrastructure: Where is the money going?
Assumed USD/INR = 40 for F2008-F2012Source: Planning Commission, Morgan Stanley Research, 20/1/10
Infrastructure Spending
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E = Morgan Stanley Research estimatesSource: Morgan Stanley Research, 15/1/10
E = Morgan Stanley Research estimatesSource: Morgan Stanley Research, 15/1/10
India & China: Infrastructure Investment (US$ bn)India & China: Infrastructure Investment
Chindia: Comparisons are at least indicative
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C + I = higher and more resilient growth
Source: CSO, CEIC, Morgan Stanley Research, 1/12/09
Quarterly GDP Growth Trend (% YoY)
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Source: CSO, Morgan Stanley Research, 7/1/10 Source: Ministry of Commerce, Morgan Stanley Research, 7/1/10
Export Decline NarrowsIndustrial Production
A near ‘V’ shaped recovery
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Ultimately feeding through into corporate earnings
Source: MOSL, 11/1/10 Source: MOSL, 11/1/10
Sensex EBITDA GrowthSensex Sales Growth
Source: MOSL, 11/1/10
Sensex PAT Growth (YoY)
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Earnings could double in less than 5 years
Source: MOSL, 11/1/10
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Valuations: Not cheap, but….
Source: FactSet, MSCI, Morgan Stanley Research, 14/1/10
MSCI India PE
Source: FactSet, MSCI, Morgan Stanley Research, 14/1/10
MSCI India PB
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Institutional activity is getting more balanced
Source: SEBI, BSE, Morgan Stanley Research, 19/1/10 Source: SEBI, BSE, Morgan Stanley Research, 19/1/10
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Risks
Inflation and interest rates
Global risk appetite
Oil price
Twin deficits
Geopolitics
The unexpected
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Summary
India remains a compelling early stage growth opportunity
Infrastructure spending and consumption will drive GDP growth
Which in turn will drive earnings growth and profitability
The opportunity will be punctuated by risks and volatility…
…yet, the market could potentially double in 3-4 years
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Appendix
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The JF and JPMorgan India team
The India team
Edward PullingManaging Director,
15 years of India-related experience
Rukhshad ShroffManaging Director,
18 years of India-related experience
Rajendra NairVice President,
10 years of India-related experience
Johnny Wong Dealer,
12 years of India-related experience
Nandkumar SurtiVice President,
18 years of India-related experience
Harshad PatwardhanVice President,
16 years of India-related experience
Amit Gadgil
6 years of India-related experience
Ravi Ratanpal
4 years of India-related experience
Rohit Agarwal
4 years of India-related experience
Karan Sikka
4 years of India-related experience
The Hong Kong team
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2009: An extraordinary turnaround
Source: FactSet, MSCI, Bloomberg, 14/1/10Please note : China A Share : SHCOMP, for H-Share : HSCEIACWI : All countries world index (Developed world + Emerging markets)World Index : Developed markets
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..as BRIC economies lived up to the hype
Source: IMF, 11/1/10
GDP growth %
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Relative performance (on a FY basis)
Source: JPMorgan Chase & Co., 31/12/09Benchmark: MSCI India Net
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Performance review: 2009 = the worst of all worlds
Bottom up, stock specific
Medium/long term time frame, with an average of 3 years holding period
Overweight domestic growth plays
Quality & blue chips penalised
~9% cash in 1Q
Our Strategy The Market
Macro, factor driven
Extreme volatility in the last 12 months, with strong rotational tendencies
Driven by global commodities, beta and leverage
Leverage and beta rewarded
~100% move up in 3 months
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Investment Process
The basic premise of our process is that there are three sources of investment return:
Growth: a bigger and more profitable company adds to investment value and returns. Company contact is key to our process. We conduct hundreds of meetings per annum across countries: we analyse industries in which companies operate, the competitive landscape, management strategy to enhance competitive advantage and returns. As part of our process we not only meet companies but we meet with their competitors, distributors, suppliers and other stake holders.
Valuations: how a company is valued impacts our returns. Our valuation analysis encompasses both absolute methodologies as well as relative (to history, to regional and global comparables). We also use DCF/DDM valuation frameworks, where appropriate.
Sustainable yield: In addition to capital appreciation, dividend yield is an important source of long term returns. Analysing returns involves an analysis of the growth cycle of the business, its capital intensity and financial management.
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XIth Five Year Plan Infrastructure Spending EstimatesInfrastructure Spending
Infrastructure
Source: Planning Commission, Morgan Stanley Research, 15/1/10Assumed USD/INR = 40 for F2008-F2012
Source: Planning Commission, Morgan Stanley Research, 15/1/10Assumed USD/INR = 40 for F2008-F2012
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Assumed USD/INR = 40 for F2008-F2012Source: Planning Commission, Morgan Stanley Research, 15/1/10
Source: Planning Commission, 15/1/10
Source of FundingSources of Funding: Debt & Non-Debt
But who will fund it?
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Infrastructure: Where is the money going?
Sector F1998-F2002 F2003-F2007 F2008-F2012
IXth plan Xth plan Xith plan (E)
Electricity 29 64 167
Roads 3 32 79
Telecom 10 23 65
Railways 10 26 65
Irrigation 13 24 63
Water 9 14 36
Ports 2 3 22
Airports 2 1 8
Storage 0 1 6
Gas 0 2 4
Total spending (US$ bn) 78 190 514
Assumed USD/INR = 40 for F2008-F2012Source: Planning Commission, Morgan Stanley Research, 20/1/10
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Assumed USD/INR = 40 for F2008-F2012Source: Planning Commission, Morgan Stanley Research, 15/1/10
Assumed USD/INR = 40 for F2008-F2012Source: Planning Commission, Morgan Stanley Research, 15/1/10
Debt Sources
Infrastructure financing
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Urbanisation will be a structural growth driver
Source: UN population division, World Urbanisation prospects, 7/1/10
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Source: CEA, Morgan Stanley Research, 7/1/10 Source: Morgan Stanley Utilities Team; E = Morgan Stanley Research estimates, 7/1/10
Growth in Power Generation CapacityIndia’s Power Shortage
Investment themes – Power: A crucial ingredient for growth
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Investment themes – Roads: Ambitious plans
Source: NHAI, Morgan Stanley Research, 7/1/10
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Investment themes – Insurance
World Insurance Penetration Rate(Premium as % of GDP) in 2008
World Non-Life Insurance Premium Growth – 5 Year (CAGR)
World Life Insurance Premium Growth – 5 Year (CAGR)
Source: IIFL, 11/1/10 Source: Swiss Re, CEIC, IIFL Research, 11/1/10
Source: IIFL, 11/1/10
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Source: CEIC, Morgan Stanley Research,15/1/10 Source: CEIC, Morgan Stanley Research,15/1/10
China leads India by a wide margin..
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…but does she offer a glimpse into India’s future?
Source: FactSet, 15/1/10
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Relative valuations
Source: FactSet, MSCI, Morgan Stanley Research, 14/1/10
MSCI PB: India relative to EM
Source: FactSet, MSCI, Morgan Stanley Research, 14/1/10
MSCI PE: India relative to EM
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The valuation premium is well deserved
Source: Worldscope, FactSet, Morgan Stanley Research, 14/1/10
ROE trends
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Risks: Inflation is a concern in the short term..
Source: CEIC, Morgan Stanley Research, 19/1/10
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…but monetary tightening is not bad for equities in the long term
Source: Bloomberg, RBI & CLSA 15/1/10
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Risks: Fiscal deficit is a concern but is improving incrementally
Note: *Here the off-budget items include expenditure on food, fertilizer and oil. E = Morgan Stanley Research estimates.Source: RBI, Economic Survey, Ministry of Finance, Morgan Stanley Research, 7/1/10
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Risks: Global risk appetite
Source: Bloomberg, 14/1/10
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Risks – Oil!
Source: CEIC, Morgan Stanley Research, 14/1/10 Source: FactSet, MSCI, Morgan Stanley Research, 14/1/10
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Risks: Geopolitics has been a perennial concern
Source: Anand Rathi Securities, 14/1/10
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Macro economic forecasts
* Total of Central and State Government deficit does not tally due to inter-governmental transactions. E = Morgan Stanley Research Estimates; Source: RBI, CSO, Budget Documents, and Morgan Stanley Research.
Source: RBI, CSO, CEIC, Bloomberg, SEBI, Morgan Stanley Research, 14/1/10
Years Ending March 31 F2002 F2003 F2004 F2005 F2006 F2007 F2008 F2009 F2010E F2011E F2012ENational Income GDP (US$ bn) 478 507 600 700 810 913 1,173 1,157 1,232 1,490 1,814Gross domestic product 5.8% 3.8% 8.5% 7.5% 9.5% 9.7% 9.0% 6.7% 6.7% 8.0% 7.6%Agriculture and Allied activities (incl. mining) 5.9% -5.9% 9.3% 0.8% 5.7% 4.4% 4.7% 1.8% -1.1% 5.0% 3.0%Manufacturing, Constn, Electricity 2.8% 6.9% 7.8% 10.5% 10.7% 11.2% 8.5% 3.9% 8.3% 8.2% 8.3%Services 7.2% 7.5% 8.5% 9.1% 10.6% 11.2% 10.9% 9.7% 8.6% 8.7% 8.7%Money and BankingMoney Supply (M3) growth (avg) 16.2% 16.3% 13.1% 14.2% 16.1% 19.6% 21.8% 20.3% 18.0% 20.0% 20.0%Bank non-food credit (avg y-y increase) 11.9% 25.0% 17.2% 27.5% 33.7% 31.3% 24.3% 24.1% 15.0% 23.0% 25.0%Interest rates91-Day T-Bill Yield (year-end) 6.2% 5.8% 4.3% 5.2% 6.5% 7.4% 7.3% 4.7% 5.3% 6.8% 7.0%Repo Rate (year-end) 8.0% 7.0% 6.0% 6.0% 6.5% 7.5% 7.8% 5.0% 5.0% 6.5% 6.8%PricesWholesale price index (avg y-y increase) 3.7% 3.4% 5.5% 6.5% 4.4% 5.4% 4.7% 8.4% 3.2% 5.3% 5.5%External sectorCurrent account 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0Exports (US$ bn) 44.7 53.8 66.3 85.2 105.2 128.9 166.2 188.2 173.9 216.9 261.5Imports (US$ bn) 56.3 64.5 80.0 118.9 157.1 190.7 257.8 301.9 293.4 364.2 441.6Exports as % of Imports 79% 83% 83% 72% 67% 68% 64% 62% 59% 60% 59%Invisibles, net (US$ bn) 15.0 17.0 27.8 31.2 42.0 52.2 74.6 89.6 92.5 115.2 138.3Current account balance (US$ bn) 3.4 6.3 14.1 (2.5) (9.9) (9.6) (17.0) (24.1) (27.0) (32.2) (41.8)Debt creating capital inflows (US$ bn) 2.3 (1.8) (2.1) 6.2 7.0 22.2 24.9 15.1 8.1 14.5 16.5Total capital -net (US$ bn) 8.6 10.8 16.7 28.0 25.5 45.2 108.0 2.4 56.2 67.3 74.8Foreign currency reserves (US$ bn)* 54.1 75.4 111.6 140.1 150.9 198.7 308.7 251.3 292.7 325.0 363.3Average exchange rate (USD/INR) 47.7 48.4 45.9 45.0 44.3 45.2 40.3 46.0 48.0 44.9 41.6Year end exchange rate (USD/INR) 48.7 47.6 45.0 43.7 44.5 44.0 40.4 51.3 49.0 42.9 41.0
External debt (US$ bn) 98.8 105.0 111.7 123.2 138.1 171.3 224.6 229.9 239.6 255.6 272.1External debt as a percentage of GDP 20.7% 20.7% 18.6% 17.6% 17.1% 18.8% 19.1% 19.9% 19.5% 17.2% 15.0%Fiscal deficit (As % of GDP)-----Central government 6.2% 5.9% 4.5% 4.0% 4.1% 3.5% 2.7% 6.1% 6.8% 5.8% 4.7%-----State government 4.1% 4.1% 4.4% 3.4% 2.5% 1.9% 2.3% 3.4% 3.4% 2.7% 2.3%-----Consolidated Deficit * 9.9% 9.6% 8.5% 7.5% 6.7% 5.6% 4.9% 9.4% 10.0% 8.4% 6.9%
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Macro indicators
Source: RBI, CSO, CEIC, Bloomberg, SEBI, Morgan Stanley Research, 14/1/10
Jan-09 Feb-09 Mar-09 Apr-09 May-09 Jun-09 Jul-09 Aug-09 Sep-09 Oct-09 Nov-09 Dec-09Trade Balance (US$ billion) -6.1 -1.7 -3.1 -5.0 -5.2 -6.2 -6.0 -8.4 -7.8 -8.8 -9.7 NAExports (US$ billion) 12.4 11.4 12.9 10.7 11.0 12.8 13.6 14.3 13.6 13.2 13.2 NAExports (YoY) -16.8% -24% -25% -33% -29% -28% -28% -19% -14% -7% 18% NAImports (US$ billion) 18.5 -1.7 -3.1 -5.0 -5.2 -6.2 -6.0 -8.4 -7.8 -8.8 -9.7 NAImports (YoY) -19.2% -37% -32% -37% -39% -29% -37% -32% -31% -15% -3% NAForeign Direct Investment (US$ million) 2733 1488 1956 2339 2095 2582 3476 3268 1512 NA NA NAForeign Exchange Reserves (US$ billion) 247.8 248.5 251.3 252.1 261.1 263.3 270.3 275.0 278.5 282.8 285.3 282.1Net FII Flows (US$ million) -869 -539 64 1,477 4,257 695 2,403 827 4,141 1,791 1,142 1,520Rs/US$1 (period average) 48.8 49.2 51.2 50.1 48.5 47.8 48.4 48.4 48.4 46.7 46.6 46.6M3 (YoY) 17.9% 19.6% 18.6% 20.8% 20.5% 20.2% 20.0% 19.4% 19.0% 18.3% 17.8% 17.2%Bank Loans (Non-food credit, YoY) 19.4% 18.5% 17.5% 18.1% 16.1% 15.2% 15.9% 14.2% 13.0% 10.1% 10.5% 12.7%Deposit Growth Rate (YoY) 20.8% 18.7% 21.0% 19.8% 22.5% 22.0% 21.6% 21.8% 20.5% 19.8% 18.9% 18.0%Prime Lending Rate 12.3% 12.3% 12.3% 12.3% 12.3% 11.8% 11.8% 11.8% 11.8% 11.8% 11.8% 11.8%One Year Deposit Rate 8.5% 8.5% 7.8% 7.5% 7.3% 7.0% 6.5% 6.5% 6.5% 6.5% 6.5% 6.5%364 day T-Bill Yield 4.6% 4.7% 5.0% 4.4% 4.1% 4.1% 4.1% 4.5% 4.6% 4.5% 4.5% 4.5%91 day T-Bill Yield 4.5% 4.7% 4.7% 4.2% 3.5% 3.8% 3.5% 3.9% 4.1% 3.9% 3.9% 4.3%10 yr Government Bond Yield 5.9% 6.0% 6.6% 6.5% 6.4% 6.8% 7.0% 7.2% 7.3% 7.3% 7.3% 7.3%Industrial Production 1.0% 0.2% 0.3% 1.1% 2.1% 8.3% 7.2% 10.6% 9.6% 10.3% 11.7% NAManufacturing( in %) 1.0% 0.2% -0.3% 0.4% 1.8% 8.0% 7.4% 10.6% 10.0% 11.1% 12.7% NAConsumer Goods 3.6% -1.3% 1.3% -4.6% -1.1% 4.4% 9.7% 10.9% 9.4% 11.9% 11.1% NABasic Goods -0.7% -0.1% 1.9% 4.5% 3.8% 10.7% 4.7% 7.7% 6.5% 4.6% 6.0% NACapital Goods 6.6% 15.9% 11.8% -6.3% -5.9% -3.6% 13.4% 1.7% 9.2% 13.3% 11.0% NAIntermediate Goods -7.2% -3.0% 1.9% 7.9% 6.6% 7.9% 9.8% 14.4% 11.2% 15.2% 19.4% NAConsumer Price Index (YoY) 10.5% 9.6% 8.0% 8.7% 8.6% 9.3% 11.9% 11.7% 11.6% 11.5% 11.5% NA
Wholesale Price Index (YoY)
- All Commodities 4.9% 3.1% 0.8% 1.3% 1.2% -1.4% -0.7% -0.3% 0.5% 1.2% 4.8% NA