Four sets of data over the next few days — industrial output growth for July, monthly retail and wholesale inflation for August and corporate advance tax numbers — would largely determine the Reserve Bank of India’s (RBI) next move on interest rate hikes, but analysts do not expect the new central bank governor Raghuram Rajan to cut lending rates soon.
So, don’t expect EMIs on your existing home loans to come down in a hurry.
There will also be more focus on the accompanying policy observations, which the market and economists will scrutinise closely for Rajan’s assessment of the current economic situation and any forward-looking cues when presents his maiden credit policy on September 20.
India’s factory output fell 2.2% in June—the second successive monthly contraction— while high food and vegetable prices kept retail inflation close to the worrisome double-digit level.
Capital and consumer goods output continued to decline, reflecting subdued investment activity and poor spend on goods such as cars and televisions, weighed down by flat income growth, high interest rates and rising retail inflation.
India’s retail inflation measured by the consumer price index (CPI)—a more realistic gauge as it captures shop-end prices—stood at 9.64% in July marginally lower than 9.87% in the previous month.
Experts warned that prices will surge further in the coming weeks as the knock-on effects of a sharply decelerating rupee cascade through the economy.
The government and the RBI will also keep an eye on advance tax numbers. Companies pay advance tax every quarter based on their projected income of the year and a slower growth in these reflects signs of weakening corporate income.
The imminent scale-back of an easy loan policy in the US to claw back from its crisis of 2008 is the biggest factor hurting currencies across the world. For India this has compounded the problems of a large current account deficits (CAD)—the gap between dollar outflows and inflows.
Slowing growth will hurt tax revenues, while weak equity market conditions can put the government’s disinvestment target at risk.
The prospect of a credit rating downgrade to “junk” casts a very long shadow over the market with agencies sparing no punches about India’s precarious public finances.
There will be pressure on the government to prune its spending, despite this being a pre-election year, thereby hurting growth.
“In our base line scenario, we expect rates to remain on hold this fiscal year. However, if a currency crisis continues to unfold, then the RBI may be forced to hike the marginal standing facility rate or the repo rates (RBI’s long term and short-term lending rates to banks), as a growth sacrifice may become necessary to ensure financial stability,” said Sonal Varma, economist at broking and research firm Nomura.