IIP, inflation to set tone for RBI’s policy stance
All eyes are on two sets of data to be on Monday — industrial output data for November and retail inflation for December — that will likely set the tone for the Reserve Bank of India’s (RBI’s) move on interest rates in its next policy review in February.business Updated: Jan 11, 2015 23:32 IST
All eyes are on two sets of data to be on Monday — industrial output data for November and retail inflation for December — that will likely set the tone for the Reserve Bank of India’s (RBI’s) move on interest rates in its next policy review in February.
Factory output fell by 4.2% in October from a year earlier, while retail inflation moderated to 4.38% in November on falling food and oil prices.
To tame inflation, RBI governor Raghuram Rajan has kept interest rates high since last January ignoring mounting criticism from Parliamentarians and industry leaders, who believe costly borrowings are standing in the way of greater investment and consumer spending.
Retail food inflation — a measure of how costly the platter has become — slowed to 3.14% in November compared to 5.59% in the previous month, as vegetable costs have slumped this year compared to last year.
Industrial deceleration is a bigger worry for the government. Manufacturing output fell 7.6% in October. The sector accounts for 75% of the total factory output. Consumer durables production declined 35%, showing lower spending on goods such as cars and refrigerators despite the festive season.
Capital goods output also fell 2.3% mirroring weak investment activity.
Analysts said the central bank will wait for trends in the “base effect” a statistical phenomenon that magnifies a fall because of a high base.
Onion retailed at about Rs. 80 a kg this time last year compared to about Rs. 40 a kg currently, showing a fall of about 100%.
Analysts said RBI is guided more by inflation-adjusted “real” interest rates. The repo rate—the rate at which RBI lends to banks — at 8% and retail inflation at 4.38% implies a real interest rate of about 4.5%. It could fall anyway once the inflation rate starts rising in the next few months.
“We believe the central bank will follow a framework of keeping positive real rates to the tune of about 1.5-2%. The key determinant of the magnitude of rate cuts will be where inflation settles on a sustainable basis,” investment bank Morgan Stanley said in recent research report.