Will bad news on industrial growth lead to good news on rate cuts next week? The near-zero factory output growth in April — the index of industrial production advanced by 0.1 percent —is increasing clamour for a rate action to boost a sagging economy.
The fact that the data comes a day after rating agency Standard & Poor’s warned that India might be the
first among BRIC nations to be downgraded to the junk status, heightens the need for concrete action from the Reserve Bank of India (RBI), if not the government.
The markets, however, did not react strongly to the data as the index has a history of being volatile. In March, the index declined 3.5 percent.
The RBI, while cutting interest rates in its previous monetary policy review, has, however, indicated that the current financial year may not see more rate cuts. Moreover, inflation is still not in the central bank’s comfort zone. But experts are expecting the RBI to overlook the spiralling inflation and cut the policy rate on June 18, when it reviews its monetary policy.
“The data clearly points to industrial growth being extremely weak, and it is in clear need of monetary as well as fiscal support. I think industrial growth needs monetary stimulus irrespective of what the headline inflation number shows day after tomorrow,” Abheek Barua, chief economist, HDFC Bank, told Reuters.
The government will release data on wholesale price-based inflation for May on June 14. April’s inflation figure was at 7.2 percent.
However, investors are keeping their fingers crossed with two deputy governors of the RBI expressing divergent views on a rate action. While Subir Gokarn said the central bank has elbow room to cut interest rates, KC Chakrabarty warned that the cost of borrowing will not come down significantly.
In the stock market, banks have reacted positively to the IIP data. State Bank of India Chairman Pratip Choudhary was quoted on CNBC-TV18 as saying he expected the RBI to cut interest rates. Also, there are others who see the prospects that today’s bad news will result in a rate cut.
“Tightening of rates earlier have impacted GDP and IIP numbers. Inflation may not come down, but rate cut is a must now because we are really lagging action. I wouldn’t be surprised if RBI cuts rates and CRR (cash reserve ratio) by 50 basis points each at the policy next week,” Deven Choksey, managing director, KR Choksey Securities toldReuters.
However, for now, the ball is in the RBI’s court. Watch this space for further action. (curtsey : first post)
Rupesh Yatesh Dalal
Head Research Department
Head Research Department
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