Some improvement likely in India's leveraged demand

The recent improvement in India's capital goods component has mostly to do with increased government spending on the road sector, the only major investment that is visible within the infrastructure space. 

The other important driver of the stronger IIP performance is improvement in consumer durables production. This is more an indication of inventory build-up in anticipation of an increase in demand during the forthcoming festival season, likely buoyed by falling interest rates. 

"Fact is, the inventory build-up was pretty much expected given the major bout of inventory destruction that was witnessed earlier. As of now, there's not much indication of a recovery in demand, although some improvement is expected in leveraged demand as borrowing rates start to fall", says Societe Generale.

However, the stress in rural demand should continue. Also, given that external demand remains weak as indicated by the 10th straight month of declining exports, the overall demand is expected to remain quite sluggish in the coming quarters.