IIP crawls, all eyes on RBI PDF Print E-mail
Wednesday, 13 June 2012 00:39
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Thursday’s inflation data to determine quantum of rate cut

With April’s IIP growth of 0.1% far below the consensus 1.7% thanks to years of policy paralysis and a 375-basis points hike in policy rates since March 2010 (taking into account the 50 bps rate cut last April), all eyes are on the Reserve Bank of India’s actions at its mid-quarterly review meeting on Monday.

While most analysts are looking at a 25-50 bps cut in repo rates (SBI chief Pratip Chaudhuri says be expects a CRR cut of 100 bps), a lot will depend on Thursday’s inflation data — inflation spurted to 7.23% in April and is expected to rise once the May data comes out. In April, while cutting rates, the RBI had cited an ‘upside risk’ to inflation. However, falling global oil prices and declining core inflation as well as growth offered the RBI room to adjust interest rates, RBI deputy governor Subir Gokarn said last week. While inflation remains iffy, largely due to food products, at 5.3%, GDP growth in the March quarter was the lowest in nine years.

As Citigroup economist Rohini Malkani puts it, “While our base case is one more round of rate easing, subdued trends in growth coupled with lower core inflation could result in the RBI easing more than ours as well as market expectations.” While Deutsche Bank chief economist Taimur Baig says he thinks IIP will remain weak in the next few months, “in the 2-3% range, leading to a sub-6% headline GDP growth through April-June”, HSBC’s chief economist for India and Asean Leif Lybecker Eskesen says the weakening IIP is related to the weakening export picture and so “the weakening global backdrop is likely to keep industrial output growth moderate in the coming months”.

After growing 4.3% in the last quarter, the mining sector contracted 3.1% in April, confirming first-hand the impact of policy paralysis and increased regulatory curbs. Ten of 22 major industrial groups showed negative growth in April. The biggest falls were recorded in electric machinery and apparatus (-49.2%), office, accounting and computing machinery (-14.9%) and wearing apparel (-9.1%).

Stunned by the IIP numbers, finance minister Pranab Mukherjee didn’t repeat his 7.6% GDP projection for FY13, instead saying IIP was ‘disappointing’ and that the government would give positive signals to investors — fresh out of a bruising, and losing, battle with Mamata Banerjeee on the pension Bill, he did not, however, elaborate on what the measures would be.

Though the Sensex should have fallen after Tuesday’s IIP crawl, which came a day after S&P reiterated its threat that India could be downgraded to junk levels, it actually rose 195 points as market players felt the IIP data would force the RBI to go in for a big rate cut. Growth in manufacturing output, which accounts for about 76% of industrial production, remained almost flat at 0.1% in April, compared with 5.7% a year earlier.

Whether RBI rate cuts will do the trick remains to be seen, but there can be little doubt a large rate cut, if passed on by banks, will do wonders to India Inc’s bottom line. Between July 2010 and now, based on outstanding bank credit, India Inc’s interest costs have increased by around Rs 1 lakh crore due to the rate hikes.

Better bottom lines will spur investors and help revive investment, but it is not clear whether this will be near enough. CMIE data show the number of projects that have been stalled or abandoned has doubled over the last six quarters. Some part is clearly driven by interest rates. Axis Bank senior vice-president (business and economic research) Saugata Bhattacharya points out that a 100-bps hike in lending rates reduces the internal rate of return for long-gestation projects like roads and power plants by 75 bps. A larger number of stalled projects, however, are related to ‘policy paralysis’, of the government not being able to get coal linkages for projects, firms not being able to procure land and environment clearances, among others. It is no surprise that, despite a 50-bps rate cut in April, the loan books of banks have contracted by Rs 71,000 crore compared with the corresponding period in FY12.



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