Factory Output Plunges And Prices Ease. Will RBI Oblige, – The Economic Times – 13-Dec-2014

December 23, 2014 - Uncategorized

RBI Governor Raghuram Rajan may have to seriously consider a rate cut ahead of the next monetary policy announcement, which is due in February, with industrial production seemingly in dire straits and retail inflation slowing further.

The Index of Industrial Production (IIP) unexpectedly contracted 4.2 per cent in October, the worst in three years, because of a collapse in manufacturing, data released by the statistics office on Friday showed, underlining fragile consumer sentiment and weak investments. The simultaneously released Consumer Price Index revealed a further slowing in inflation to 4.38 per cent in November — well below RBI’s 6 per cent target for Jan 2016.

On Wednesday, Rajan had said interest rate action alone won’t lift the economy after lawmakers, backed by Finance Minister Arun Jaitley, called for cuts. But he may find it hard to justify why such a stimulus, for whatever it’s worth, should be denied to the economy with inflation easing. A global slowdown that has already impacted India’s exports has added to concerns.

“This is really a loud wakeup call for Rajan to cut rates immediately and for the finance minister to get on with reforms. How much further will Rajan want industry to contract before easing rates?” asked Rajiv Kumar, senior fellow, Centre for Policy and Research, calling for an immediate out-of-policy-cycle rate cut.

Rajan did not cut rates at the last review on December 2, standing firm against demands by industry and suggestions to this effect by the government. But he did say that rates could be cut early in the new year if inflation continued to slow, adding that a mid-cycle review was also possible. The next monetary policy review is scheduled for February 3, 2015.

On Wednesday, Jaitley said in the Lok Sabha that lower interest rates will encourage people to buy homes after some members asked why Rajan was not cutting them.

Base Effect in Inflation

The Indian economy expanded 5.3 per cent in the July-September quarter, slower than 5.7 per cent in the preceding one, raising fears that recovery was faltering after two years of below-5 per cent expansion. The latest IIP numbers will add to those concerns.

Some analysts have already cut growth forecasts for the year after the poor second quarter data and may further pare estimates. “A whole bunch of indicators besides periodic blips suggest that the industrial sector is in the doldrums. Though we might see base effect in inflation… time for rate cut is imminent,” said Abheek Barua, consultant at think tank ICRIER.

The industrial production numbers contained a preponderance of negatives — 16 out of 22 manufacturing sub-sectors contracted in October, with the most significant fall seen in the radio, TV and communication equipment segment at 70.2 per cent, despite the festive season. The motor vehicles and transport segment contracted by 9.8 per cent.

“It is disappointing, more so because October is one of the peak spending months when rural incomes increase and two festivals should have prompted consumer spending. It does appear more was spent on gold,” said Madan Sabnavis, chief economist, Care Ratings.

Overall, manufacturing contracted 7.2 per cent in October while consumer durables production fell 35.2 per cent from a year ago, indicating a deep slump in consumer appetite. This is the worst manufacturing growth since February 2009.

A strong 13.3 per cent rise in electricity generation and a 5.2 per cent increase in mining output pulled up the overall numbers, but did little to dispel the gloom. With consumer inflation declining further, the case for keeping interest rates unchanged has weakened.

Industry again pushed for rate cuts. “It not only reflects a slowdown in investments but also the deep-rooted slackness in consumer demand, which requires bringing down the interest rates urgently,” said Sidhartha Birla, president, Ficci.

November’s core CPI inflation eased further to 5.5 per cent from 5.85 per cent in October. Food inflation fell sharply to 3.1 per cent from 5.59 per cent However, some experts called for caution on inflation arguing that the base effect had magnified the drop and that the benefit will not be available from December.

“The distinct moderation in CPI inflation to 4.4 per cent is admittedly a good sign for the economy; however, this has been on the back of a high base effect last year. It comes over the highest CPI inflation of 11.2 per cent last year,” Care Ratings said, adding that the cushion will not be available in the months ahead.

Add to this the generally volatile and undependable nature of IIP data and rate-cut expectations may be discounted by the market, experts said. Rajan has always said he won’t ease up on the price front until the battle against inflation is well and truly won.


The Economic Times

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