The July IIP growth number, at 13.8% year-on-year, has been quite remarkable though the accompanying downward revision of the June IIP by 130 basis points to 5.8% took away some of the joy. If the growth in capital goods was an unbelievable 63%, some of it was due to the very weak base of July 2009 and since these numbers tend to be somewhat lumpy, one needs to see whether the investment cycle has really turned. And also whether private investment apart from that in the infrastructure segment is looking up. The evidence on the ground doesn?t seem to match up especially when it comes to the growth in bank credit which is running at just under 20% year-on-year; despondent bankers are attributing this to cash surpluses with companies and the current trend of firms borrowing more for the short term through Commercial Paper. But demand for commodities like cement has been somewhat subdued with capacities in some pockets remaining underutilised. Equally important, exports, which are fairly highly correlated to IIP, have slowed to the mid-teens and, in three of the last four months, have seen lower month-on-month growth. Given that global growth in the second half of the year is surely going to slow down, the outlook for exports doesn?t look so promising right now. ?

The big question, therefore, ahead of the central bank?s review meeting later this week, is whether the regulator will increase key policy rates or take a break after raising rates four times since mid-March. The inflation numbers don?t inspire confidence; the CPI came in at a fairly high 11.5% as did the food inflation at11.5% for the week ended August 28, 2010, near a two month high. Not everyone is now sure that wholesale inflation will taper off to 6% by March 2011, it could perhaps settle at 7%. And the Reserve Bank of India (RBI) is determined to anchor inflationary expectations. On the other hand, the below-trend growth in the developed world could be prolonged with fears of deflation now emerging. Yields on the US ten year treasury hit 2.5% in August, levels that were seen about six decades back. Moreover, the US Federal Reserve has indicated that it would continue to stimulate the economy if needed though JP Morgan believes that even if the Fed buys treasuries worth $500 billion or even one trillion, it may not be enough to stimulate the economy.

On last Thursday, the Bank of England kept interest rates unchanged at 0.5% for 18 months in a row but did not announce any new quantitative easing purchases. Nevertheless, globally most economies are expected to see accommodative monetary policies and low interest rates. In India, however, lending rates have gone up over the last couple of months, especially at the shorter end of the curve where they have risen by as much as 200 basis points. The transmission of policy rates is clearly happening; nearly half a dozen banks have upped their lending rates. Also, RBI had indicated in late July that it wanted to keep liquidity in ?deficit mode? so money is unlikely to become cheaper in a hurry. Although the IIP number suggests growth is stabilising at home, globally the worries have only increased so it?s possible, RBI will wait till early November to raise policy rates.