Easing inflation, slowing industrial output put pressure on RBI to cut rates

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New Delhi: India’s industrial output slowed and retail inflation eased, adding pressure on the central bank to reduce interest rates to boost economic growth.

Data released by the Central Statistics Office showed the index of industrial production (IIP) slowed marginally to 3.1% in April from 3.8% a month ago as mining production and electricity generation eased. Retail price inflation, as measured by the consumer price index (CPI), slowed to 2.18% in May from 2.99% a month ago as food prices started falling from their year-ago level.

Slower industrial output growth and lower inflation may put pressure on the Reserve Bank of India (RBI) to change its policy stance to accommodative from neutral. Last week, RBI kept policy rates unchanged in its latest monetary policy review, citing an uncertain inflation outlook.

Following RBI’s decision, chief economic adviser Arvind Subramanian publicly disagreed with the central bank, suggesting that softening inflation and slowing economic growth warranted a “substantial monetary policy easing”.

“In recent times, seldom have economic conditions and the outlook warranted substantial monetary policy easing (as much as now),” said Subramanian. Growth has decelerated from July, Subramanian said, citing several economic indicators including real gross value added (GVA), industrial output, capital formation and capacity utilization in industry.

In its monetary policy review, RBI said the easing of inflation, excluding food and fuel, may be transient in view of its underlying stickiness in a situation of rising rural wage growth and strong consumption demand.

“Thus, the April reading has imparted considerable uncertainty to the evolving inflation trajectory, especially for the near months. If the configurations evident in April are sustained, then absent policy interventions, headline inflation is projected in the range of 2.0-3.5% in the first half of the year and 3.5-4.5% in the second half,” it added.

An early onset of the annual south-west monsoon and prospects of ample rain have led to higher-than-normal sowing of rain-fed kharif crops across India, according to data released by the agriculture ministry on Friday.

Higher-than-normal planting is expected this year after the India Meteorological Department (IMD) forecast that the June-to-September south-west monsoon will bring 98% of the normal or long-period (50-year) average rain.

IMD has forecast that rainfall will be well distributed across the country, including in the southern states where it was deficient last year.

The business expectations index generated by the RBI’s April round of the Industrial Outlook Survey reflects optimism in the manufacturing sector in the second quarter of 2017-18, driven by expectations of rising rural demand, exports and profit margins.

On the other hand, the manufacturing purchasing managers’ index (PMI) moderated sequentially in May as employment contracted and new orders, both domestic and exports, slowed.

Madan Sabnavis, chief economist at CARE Ratings, said industrial activity is expected to expand this fiscal year owing to improved demand across various segments.

“Increased government expenditure and pick-up in private sector investment could provide the stimulus to the industrial sector. Consumer durables demand is likely to pick up in the second half of the fiscal year owing to good monsoon and farm harvest,” he said.