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Dark data: Inflation, IIP data dim economic outlook, dash hopes of RBI interest rate cuts

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New Delhi | Updated: December 13, 2017 6:06:48 AM

The latest sets of economic data released on Tuesday heightened the fear that a recovery might barely have materialised as yet, even as it demolished whatever slim chances existed for a rate cut by the Reserve Bank of India (RBI) in the February review of the monetary policy.

iip data leak, inflation data leak, rbi data leak, rbi interest rate cutting chancesIn fact the question now is whether 2018 will see a tightening by the monetary policy committee, even though some analysts reckon the rates to be on hold through 2018 as the RBI has a sufficient real rate cushion to absorb higher inflation. (Source: AP)

The latest sets of economic data released on Tuesday heightened the fear that a recovery might barely have materialised as yet, even as it demolished whatever slim chances existed for a rate cut by the Reserve Bank of India (RBI) in the February review of the monetary policy. In fact the question now is whether 2018 will see a tightening by the monetary policy committee, even though some analysts reckon the rates to be on hold through 2018 as the RBI has a sufficient real rate cushion to absorb higher inflation. As per Consumer Price Index (CPI) data, retail inflation accelerated in November to a 15-month high of 4.88%. Though the main driver of the uptick was faster rises in prices of food products including the seasonal and about-to-abate spurts in key vegetables like tomato, core inflation — non-food/non-manufactured goods — also witnessed a worrisome 26-basis-point increase to 4.86% in October. Despite being a festive month that also saw post-goods and services tax restocking by the trade which could have boosted production, industrial output growth slowed to a three-month low of 2.2% in October compared with 4.2% a year ago— consumer durables output in the month was down 6.9% annually; the mining sector that exhibited robust growth in the previous two months lost steam in October to record a flat growth of 0.2%.

Most analysts said the latest headline inflation figure and the core component of it were higher than they expected, and some of them upped their March-end projection to close to 5%. The RBI’s monetary policy committee, which avers on its objective of keeping retail inflation close to 4% on a sustained basis, last week estimated it to be in the range of 4.3-4.7% in Q3 and Q4 of this year, compared with 4.2-4.6% seen in the October policy review. The latest data gave credence to the MPC/RBI view expressed last week that “moderation in inflation excluding food and fuel observed in Q1 of 2017-18 has, by and large, reversed. There is a risk that this upward trajectory may continue in the near term.” The RBI had observed that housing inflation would peak in December due to the impact of the release of higher allowances to the central government staff; in November, housing inflation was up 7.36% from a year ago.

“While we expect food prices to reverse somewhat in coming months, the core inflation momentum is worrisome. This suggests that the slowdown in core inflation in Q1FY18 was a one-off,” said A Prasanna, economist at ICICI Securities Primary Dealership, Mumbai. While holding rates and retaining its neutral stance, the MPC/RBI last week said that they will look at the inflation/GDP data flows in the coming months and quarters to determine regarding the policy. Sunil Sinha, director and principal economist, India Ratings, said: “Clearly the pressure from inflation is becoming more apparent… In my view, the scope for any rate cut this fiscal is completely ruled out. I do not see much of change in RBI’s stance in the next six months.” Sinha added that if the inflation pressure continues beyond this level, “One can expect the central bank to change its policy stance to hawkish, but that’s unlikely to happen any time soon.”

“In November, the pick-up in inflation was broad-based, driven mainly by a 250-bps on-month rise in food inflation, a 110-bps rise in fuel inflation on the back of higher global oil prices, and a 40-bps pick-up in core inflation reflecting the impact of payment of higher house rent allowances,” Crisil Research wrote.

“Inflationary pressures are again in the spotlight with the crude oil price seeing a sustained rise, impact of payment of higher house rent allowances to government employees, rising rural wages, some indication of return of pent up demand in the economy and a weak base,” it added. The agency observed that, on the downside, items of mass consumption could see softer prices if the recent downward revision in GST rates on some items is passed on to consumers.

While the official data recently indicated a recovery in manufacturing in July-September with the gross value added in the segment growing 7%, the annual rise in manufacturing IIP (Index of Industrial Production) was a dismal 2.5% in October, down from 3.8% in September and 5.9% in the year-ago month.

Of course, there exists an incongruity between the GDP and IIP data on manufacturing as the former gauges value addition other than output growth too, but since a large cross-section of industries, especially export-oriented ones like textiles and apparel, leather, paper, chemicals and plastics reported negative growth rates in October, the narrative of a manufacturing revival seems more doubtful now. Eight core-sector industries had grown 4.7% in October, the same rate at which they expanded in the previous month, but barring steel and fertilisers, six of them had posted a sequential decline in growth.

Reflecting festive purchases, consumer non-durables grew 7.7% in October and 10% in September. Though the capital goods segment, where volatility is the norm partly due to seasonality of reporting, is registering relatively strong annual growth rates of late — up 6.8% in October versus 7.4% in September — these were on favourable bases. Among industries, pharmaceuticals, medicinal chemical and botanical products registered robust growth of 23% in October and 26.4% in September. The cumulative growth rates in mining, manufacturing and electricity sectors in April-October 2017 were 3.4%, 2.1% and 5.3%, respectively, over the corresponding period a year ago.

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