Strong case for rate cut

Updated: Nov 22, 2014 2:01 AM

Retail inflation in October has fallen to 5.5%, which is the lowest since the inception of the new series.

Retail inflation in October has fallen to 5.5%, which is the lowest since the inception of the new series. The moderation was entirely as a result of favourable base effects in food inflation, which fell to 5.8% year-on-year in October from 7.6% in September. Even the wholesale price index-based inflation in October has fallen to a five-year low of 1.8%. So, the retail inflation is now below the Reserve Bank of India’s (RBI) 6% target by January 2016.

While industrial growth picked up in September because of pre-festive production boost, much of the rebound was due to the volatile capital goods sector. However, excluding capital goods, the growth in factory output moderated as a result of still weak consumer durables output and muted growth in consumer non-durable goods. The GDP data for the three months to September, which will be released by the CSO on November 28, will be crucial to gauge the state of the economy.

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The easing of inflation and sputtering industrial output have rekindled hopes of a rate cut by the central bank in its December 2 monetary
policy meeting. Lower cost of capital will give the much-needed fillip to the economy. In fact, an RBI study recently estimated that a 100 basis points (bps) increase in nominal lending rates reduces the investment rate by 11 bps in the short run and 61 bps in the long run.

A report by Bank of America-Merrill Lynch says real rates faced by the industry are at historical highs, which is hurting economic
recovery. For companies, the incentive to invest will depend on the visibility of rising demand that will come with rate cuts.

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