Business Today

May factory output slows but RBI unlikely to pause with rate hikes

The slow growth of factory output in May is unlikely to persuade the Reserve Bank of India (RBI) to reconsider its monetary policy of tightening interest rates to combat inflation.

Sanjiv Shankaran        Last Updated: July 27, 2011  | 14:16 IST

Factory output in May grew by 5.6 period over the corresponding period last year, lower than the median rate of 8.2 per cent forecast by economists in a Reuters poll.

The slow growth of factory output in May is unlikely to persuade the Reserve Bank of India (RBI) to reconsider its monetary policy of tightening interest rates to combat inflation.  Inflation had touched 9.06 per cent in May.

"We are in for more rate hikes," D.K.Joshi, chief economist at Crisil Ltd, said.

In mid-June RBI had increased its policy rate by 25 basis points (one-hundredth of a percentage point). At present the policy rate, or repo rate (at which RBI lends to banks) is 7.5 per cent.

Though growth in May's factory output, as represented by the Index of Industrial Production (IIP ), may not persuade RBI to change its monetary policy stance, it may have a bearing on the magnitude of future rate increases.

"The degree of slowdown in growth would have implications on RBI's rate increase plans," said Sudhakar Shanbhag, Chief Investment Officer, Kotak Mahindra Old Mutual Life Insurance Ltd, in an emailed statement.

Growth of May's factory output was dragged down by a slow pace of increase in manufacturing output. Manufacturing output in May grew 5.6 per cent, lower than the 6.3 per cent growth recorded in April.

A media statement issued by the statistics ministry said the April factory output was being revised downwards to 5.76 per cent from the 6.3 per cent announced last year. Typically, when growth begins to moderate, high frequency data such as monthly factory output gets revised downwards as provisional figures are replaced by final ones.

The average growth in factory output for the first two months (April- May) of 2011-12 was 5.7 per cent. Joshi forecast factory output would grow faster in the rest of the year and average 7 per cent for the fiscal.

Disaggregate data on May's manufacturing output showed capital goods recorded a slowdown in the pace of growth as compared to April. Capital goods in May grew 5.9 per cent, as compared to a growth of 6.9 per cent in April.

 

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