Sluggish IIP, sticky inflation may prolong RBI rate pause

Written by Express news service | New Delhi | Updated: Sep 13 2014, 13:34pm hrs
Industrial activityIndex of industrial production (IIP) declined to an abysmal 0.5 per cent in July compared to 3.4 per cent achieved in June and 5 per cent in May.
Even as the retail inflation during August eased marginally to 7.8 per cent from 7.96 per cent, the industrial production growth in July plummeted to a four-month low of 0.5 per cent, posing a huge challenge to the Reserve Bank to strike a balance between falling investments and reining in inflation while reviewing its monetary policy.

The RBI is scheduled to review its monetary policy on September 30 and experts are of the view that the key interest rates would be left untouched as the central bank works towards 6 per cent retail inflation by January 2016. According to the consumer price index (CPI) data released by the government, retail inflation eased on the back of declining prices of vegetables, cereals and petroleum products. In August 2013, retail inflation was at 9.52 per cent.

However, even as the CPI declined, food inflation during the month rose to 9.42 per cent over 9.36 per cent in July, a development that will make it difficult for the RBI to cut interest rates. Meanwhile, the index of industrial production (IIP) declined to an abysmal 0.5 per cent in July compared to 3.4 per cent achieved in June and 5 per cent in May.

Calling it a worrying development, India Inc said that government should immediately implement the Make in India policy to boost manufacturing sector, which contracted 1 per cent during the month. The policy was announced by Prime Minister Narendra Modi during his address to the nation on the Independence Day. While we were hoping that slowdown in manufacturing had bottomed out, it appears it may not out be out of the woods. It is worrying that deceleration in July is somewhat broad based extending to consumer durables and capital goods, Sidharth Birla, president, Ficci, said.

Saugata Bhattacharya, chief economist of Axis Bank, said that the higher IIP numbers witnessed in the first quarter were largely a function of base effect. Consumer durables have not fared well due to poor export show in gems and jewellery sector and not-so-good performance by sectors like mobile phones. Deficient rains have also played spoilsport. However, in second half of the year, we will see a pick up. IIP should be in range of 4.1-4.2 per cent in 2014-15, he said.

Capital goods contracted 3.8 per cent as against growth of 15.7 per cent in July 2013 whereas consumer durables declined 20.9 per cent as against a contraction of 9.6 per cent in July 2013.

During July, the electricity generation posted a robust growth of 11.7 per cent compared to 5.2 per cent during the corresponding year-ago period and the mining sector posted 2.1 per cent growth compared to a contraction of 3 per cent in the same period last fiscal.

Reacting to the inflation and IIP numbers, Care Ratings said that the inflationary possibility stemming from lower kharif output remains a concern.

While the moderation in CPI is a good sign, threats to inflation continue to prevail primarily as global geopolitical tensions remain elevated. Going ahead, CPI is estimated to remain within the range of 7-8 per cent in the current fiscal. We do not expect RBI to change its stance in the upcoming credit policy and thereby repo rate is likely to remain unchanged ...We expect the industrial production to average 3-4 per cent during the current fiscal, it said in a statement.