Economy

Analysts see room for rate cut as IIP, inflation numbers disappoint

Our Bureau New Delhi | Updated on September 12, 2019 Published on September 12, 2019

Room for RBI to slash rates further: analysts

Amidst fears that the slowdown is deepening, factory production picked up in July. At the same time, the rate of retail inflation moved a tad up in August.

According to data released by the government’s statistics wing, the rate of industrial production, as reflected by the Index of Industrial Production (IIP), came in at 4.3 per cent in July as against 1.1 per cent in June and 6.5 per cent in July last year. Similarly, the rate of retail inflation, represented by the Consumer Price Index (CPI), moved up a bit to 3.21 per cent in August as against 3.15 per cent in July and 3.65 per cent in August 2018.

Monetary policy

The reading of these two key economic indicators has prepared the ground for one more rate cut by the Monetary Policy Committee (MPC) when it convenes for its next bi-monthly meeting next month, experts say. “With the CPI inflation recording only a mild increase in August 2019 despite the sharp uptick in food inflation, we continue to expect the MPC to reduce the repo rate by 15-25 bps in the October 2019 policy review, given the continuing concerns related to economic growth,” Aditi Nayar, Principal Economist with ICRA, said.

Echoing similar sentiments, Devendra Kumar Pant, Chief Economist with India Ratings & Research, said that with first quarter GDP growth falling to 5 per cent and private final consumption expenditure growth declining to 3.1 per cent, the pressure will be on the RBI to take monetary measures to support growth.

Retail inflation

While the late surge in monsoon rains has narrowed the year-on-year gap in kharif sowing to a mild 0.6 per cent as on September 6, the flooding in certain areas has led to a continued rise in the prices of vegetables such as onions. This, in conjunction with an unfavourable base effect, is likely to contribute to a hardening of food inflation in the ongoing month. “At present, we expect the CPI inflation to inch up in the next print, while remaining well below the MPC’s target of 4 per cent,” Nayar said.

Though CPI inflation is below the RBI’s target of less than 4 per cent, the 13th consecutive month that it has remained so, it has gradually inched up from December 2018. The latest inflation mainly originated from meat and fish, vegetables, pulses and products, health, education, and personal care and effects. Core-core inflation (excluding food, energy, transport and communication), a proxy for demand conditions in the economy, has remained less than 5 per cent since April 2019.

Industrial production

July IIP growth, on the other hand, increased to a two-month high. Unlike June 2019, all three sectors — mining (4 .9 per cent), manufacturing (4.2 per cent) and electricity (4.8 per cent) — contributed to the IIP growth. However, use-based group growth performance was volatile, while capital goods contracted for the seventh consecutive month, and consumer durables, for the second consecutive month.

 

Published on September 12, 2019
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