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Rate cut comes knocking again

The sharp growth in India's factory output that expanded by 8.2% in October have rekindled hopes of an economic recovery. HT reports. Duvvuri's Dilemma

business Updated: Dec 17, 2012 02:07 IST
HT Correspondent

The sharp growth in India's factory output that expanded by 8.2% in October have rekindled hopes of an economic recovery and a day ahead of the Reserve Bank of India's (RBI's) mid-quarter review the question uppermost in the minds of many is: Will the central bank announce an interest rate cut on Tuesday?

The growth in the index of industrial production (IIP)-the closest approximation for measuring economic activity in the country's business landscape-jumped sharply in October primarily led by 9.6% growth in manufacturing and 16.5% in consumer durables.

Growth in consumer durables' output growth, which clocked a 20-month high in October, clearly mirrors an annual trend on greater spend on television, refrigerators and cars http://www.hindustantimes.com/Images/Popup/2012/12/17_12_12-buss19b.jpgevery autumn during festivals.

Analysts, however, said that RBI will be guided more by trends on the price front and also on the low probability of sustainability of the recent industrial growth.

The fact that automobile sales slumped again in November to 1.3% versus 13% in October supports the view that the jump in consumer durables growth may not be sustainable.

The RBI uses monetary tools, such as the repo rate, to stymie demand and cool prices.

A higher repo pushes up banks' borrowing costs prompting them to increase interest rates for final home, auto and corporate borrowers.

The IIP growth notwithstanding, November consumer inflation data reinforces our call of RBI maintaining a status quo," said Shubhada Rao, chief economist, Yes Bank.

At 9.9% in November, India's overall consumer price inflation-- a more realistic cost-of-living measure because it captures shop-end prices -is again nudging uncomfortably close to double digits.

"The IIP growth (in October) is unlikely to impact RBI's rate decision. It's unlikely that RBI will deviate from its guidance of a rate cut in this quarter. We expect RBI to cut repo rate by 0.50 percentage points the January policy meeting," said Deepali Bhargava, chief India economist of Espirito Santo Securities, a research and broking firm.