The Consumer Price Index (CPI) inflation has eased to better-than-expected levels of 5.05% and the contraction in Index of Industrial Production (IIP) paints a grim picture of growth – but both these major economic indicators are unlikely to compel the RBI to cut rates in its October monetary policy review. A sharp decline in vegetable, food and beverages inflation led to retail inflation easing to a five-month low of 5.05% in August. Disappointingly, the industrial production contracted by 2.4% in July. IIP saw its worst performance in eight months because of declining output in manufacturing and capital goods sectors.
On October 4, 2016 will be the new RBI governor Urjit Patel’s first monetary policy review, which will also be the first time that the Monetary Policy Committee (MPC) will take a call on rates. With a stiff inflation target of 4%, RBI is likely to maintain a cautious stance and keep key rates unchanged, feel analysts.
Says Dr Arun Singh, Lead Economist at Dun & Bradstreet India, “I think there is little hope of a rate cut in the October review. RBI will look at three things; the expectations regarding inflation, the sustainability of this inflation number and the geo-political risks to things like crude oil prices. While inflation may have come down to better levels than most had anticipated, it remains to be seen if this will continue over the next two to three months.” “Also, RBI is well aware that the 7th Pay Commission will feed into consumption and inflation, which in turn would make it cautious on the rate cut front. December looks more likely to be the time when RBI would look to cut rates,” Singh told FE Online.
In its report analysing the two data points, Crisil said, “The RBI kept its policy rate unchanged at 6.5% at its August 9 meeting, this (inflation data) increases the chances of a rate cut in October. But, RBI might chose to wait for some more time before wielding the knife.”
Shubhada Rao, Chief Economist at Yes Bank also sees the RBI cutting rates in this year, but October seems less likely. “IIP data indicates that broad-based recovery remains elusive. However, with a good monsoon and 7th Pay Commission driving consumption, coupled with the festive season, I think the industrial production will recover. This will be majorly on the back of consumption. The headline inflation should also continue to come down,” she said. According to Rao, one of the major factors driving inflation, which is food inflation, seems to be moderating. “High frequency indicators suggest that food inflation will come down further so that we may see a few prints of sub-4% headline inflation in December. Overall for the year the average inflation would be around 5%. We maintain that RBI will likely go for a rate cut in the October-December quarter,” she told FE Online. “There is no guarantee that it will happen in the October review, also because the FCNRB effect would be looming at that time,” she added.
Anubhuti Sahay, Head, South Asia Economic Research (India) at Standard Chartered Bank is hopeful of a December rate cut. “The industrial output was expected to contract in July, but this number is weaker than our expectations. The capital goods sector continues to see weakness, electricity output is weak, even two wheeler numbers were in single digits. The investment sentiment is weak,” she said. “Going ahead some recovery is likely on the back of consumption coming in due to good monsoon and 7th Pay Commission, but the IIP growth will not touch its previous highs, because overall investment remains weak,” Sahay told FE Online. “On the CPI front, I expect the inflation to moderate further to sub-5% levels and in that sense there is scope for RBI to cut rates in 2016 itself, but October would be too early as the central bank would like to watch the trend,” she concluded.