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Ahead of Feb 2 monetary review, disappointing IIP numbers and rising inflation put RBI in a tough spot

Equally worrying retail inflation and IIP data significantly diminish RBI Governor Raghuram Rajan's scope to effect a rate cut.

Sumant Banerji        Last Updated: January 13, 2016  | 14:07 IST
Ahead of Feb 2 monetary review, disappointing IIP numbers and rising inflation puts RBI in a tough spot
Equally worrying retail inflation and IIP data significantly diminish RBI Governor Raghuram Rajan's scope to effect a rate cut. (Photo: Reuters)

There is a broader agreement among all bureaucrats at North Block that sluggish pace of private investment is perhaps the biggest worry for the government. When companies do not invest, it is an undeniable proof of lack of confidence in the economy. No amount of lip service can undo that.  

The best fiscal tool in the hands of any government to usher in growth and revive investment cycle is to bring down interest rates. If the cost of raising capital comes down, it is at least one less worry for any corporate leader, especially in times when distressed assets are strewn all around.

On this count, Tuesday's disappointing set of Index of Industrial Production (IIP) numbers that declined or contracted by 3.2 per cent in November 2015 (over Nov 2014) against a robust 9.8 per cent growth in October 2015 (over Oct 2014) is terrible news. Coupled with an equally worrying rise in retail inflation that has now touched an uncomfortable 5.61 per cent in December 2015, capping a five-month rising trend, it significantly diminishes RBI Governor Raghuram Rajan's scope to effect a rate cut.

Deeper analysis of the numbers shows there is little to cheer. The IIP for the mining and electricity sectors grew by 2.3 and 0.7 per cent respectively in November but manufacturing sector recorded a steep contraction of 4.4 per cent. Part of it can be attributed to the floods in Chennai - a major automobile hub, but other sectors did no better. Seventeen out of the 22 industry groups in the manufacturing sector have shown negative growth during November 2015 as compared to the corresponding month of the previous year. The steepest decline was in electrical machinery & apparatus that contracted (-) 46.5 per cent.

"After registering a growth rate of 9.9 per cent in October 2015, the severe downfall in IIP numbers to -3.2 per cent in November 2015 is a major worrying factor as the industry was expected to grow in a good growth trajectory," says Dr. Mahesh Gupta, President, PHD Chamber of Commerce and Industry. "Slowdown in domestic demand is a major factor and government must take demand boosting measures to help industry growth to revive in the coming times."

The rise in inflation was on expected lines but that is one area where a surprise would have been welcome. What is even more disconcerting, the increase comes despite 12-year low price of oil. Provisional food inflation for December 2015 has now nudged up to 6.4 per cent against 6.04 per cent in November and just 3.96 per cent in December 2014.
"There was some upside negative surprise on a broad-based food inflation," says Madhavi Arora, economist, Kotak Mahindra Bank. "However, correction in global oil and food prices will counter the impact of the upside risks to inflation. Given that global disinflationary forces strengthened in the last one month with respect to oil and food prices, we expect the RBI to cut the repo rate early next fiscal year. However, RBI rate cuts will also be subject to the fiscal consolidation path the government announces in the Budget and the mix of fiscal stimuli will be important for the RBI to decide on further rate cuts."
 
Given the expectations of a further slide in oil prices - Goldman Sachs has predicted prices will crash to $20 a barrel - and relative softness in other commodities like steel and rubber, there may be some relief for inflation in the ensuing months. For the time being, though, Rajan may just adopt a hawkish stance.

"The January-March inflation is tracking close to RBI's estimate of 5.8 per cent. While recent sharp declines in crude prices add to our conviction on scope for a residual cut in the repo rate, RBI is likely to wait for clarity on the government's fiscal stance before deciding on such a move," says Abhishek Upadhyay, Economist, ICICI Securities Primary Dealership Ltd.  

This will surely not liven up things at corporate board rooms or the North Block. 

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