Right time to cut interest rate

Written by Sushim Banerjee | Sushim Banerjee | Updated: Oct 21 2014, 09:08am hrs
It is interesting to note that we are passing through a phase of declining prices. Because of geo-political issues, brent crude prices have crossed the $100 barrier. The immediate relief is discernible in our trade balance figures. The indigenous prices of petrol and diesel have subsequently fallen, along with decontrol of diesel prices.

The drastic fall in prices of iron ore (from $150/t cfr China to $81/t cfr) and coking coal (from $190/t fob to $113/t fob) must benefit steel producers with captive mines, such as SAIL and Tata, but for the recent apex court ruling on closure of some coal blocks that include a few captive mines also.

The import route for coal and iron ore is a viable alternative for some big producers, but it only highlights the critical gap in our policy planning and the myopic strategy pursued by domestic players on mine exploration, beneficiation and agglomeration activities that could have saved a mineral-rich country from the impasse it is in.

NMDC, as a major iron ore producer, has been holding the price level for three months, however, if the falling trend in the global market for iron ore continues, it may have to bring down domestic sales price of fines and lump.

As the cost of raw material comprises 35-45% of total cost depending on the route of production, reduction in input prices (coking and non-coking coal, iron ore and fuel oil) must have a positive impact on cost and price of steel in favour of consumers. The downward trend in diesel and petrol prices should trigger a downward pressure on distribution cost of producers and encourage them to boost marketing of products in distant regions.

One crucial factor in the linkage between raw material and finished products is demand, which is a casualty all over the globe. China is restructuring the domestic economy away from heavy industrial investment to light engineering, consumer driven and sustainable growth. It has cut down its appetite for import of coal and partly in iron ore and is pushing exports to get the mills running.

The surge in imports from China to India, particularly in TMT bars, HR coils and plates, with competitive landed prices is a dampener for any upward movement in domestic prices.

Domestic steel prices in China are showing a downward trend and it would be more displayed in its export offers. Europe and Japan are grappling with slower growth and the latest worry is about falling growth in the US.

While the continuation of Federal stimulus measures would keep interest rates under control and therefore not unleash the outflow of capital from some emerging economies like India, the USs need for imports is likely to slow down. All this got reflected in IMFs assessment of global growth coming down from 3.7% (April 2014) to 3.3% (October 2014).

The downtrend in manufacturing prices (2.84% in September 2014 over last year) would continue unless the positives on the demand side are taken care of. A few mega projects must commence construction. Clearances of some stalled projects are yet to reflect in actual project implementation in a big way. The price index for September 2014 at 2.38% growth over the last year should make RBI happy that its hawkish monetary policy has been successful.

But looking at the abysmally poor growth rate in almost all industrial segments, is it not the appropriate time to reduce the repo a little in line with declining price levels to rejuvenate the sagging industrial sector.

The author is DG, Institute of Steel Growth and Development. The views expressed are personal