Record low inflation, slow IIP growth put focus on RBI for rate cut
Mumbai/New Delhi: Retail inflation eased to a record in June and factory output growth slowed sharply in May, ratcheting up pressure on the Reserve Bank of India (RBI) to cut interest rates.
Chief economic adviser Arvind Subramanian immediately and implicitly called for an easing of monetary policy.
Inflation as measured by the Consumer Price Index (CPI) slowed to 1.54% in June from 2.18% in May, data released by the government on Wednesday showed.
The Index of Industrial Production (IIP) rose 1.7% in May compared with 3.1% in the previous month.
The latest data was released three weeks before the RBI’s monetary policy committee under governor Urjit Patel meets to review policy, and makes a rate cut more likely.
“Clearly, this low number (CPI) and what it implies about underlying price pressures—as well as the latest Index of Industrial Production (IIP) data just released—is something that, I am sure, all policymakers will reflect upon very, very carefully,” Subramanian said in a statement, implicitly directed at RBI.
Subramanian argued that the low and “heartening number” is consistent with the ministry’s analysis of a paradigm shift in the inflationary process to low levels.
“A shift that I think has been missed by all reflected in the large, one-sided and systematic inflation forecast errors that have been made,” he said.
Subramanian described the low retail inflation as the sign of ongoing consolidation of macroeconomic stability. The last time inflation had slowed to such an extent was in 1999, under a slightly different series, he said.
Consumer price inflation is at its lowest since the country started releasing retail inflation data in January 2012 based on a combined CPI index for rural and urban consumers. Industrial production growth, which had shown a sudden jump in March, subsequently eased for three consecutive months, according to data released by the Central Statistics Office.
A sharp fall in prices of vegetables and pulses aided the slowing of retail price inflation. A bumper crop has lowered the prices of farm produce, prompting farmers across the country to demand more remunerative prices.
RBI, in its last monetary policy review on 7 June, kept key interest rates unchanged but lowered the statutory liquidity ratio—the portion of bank deposits that have to be invested in government bonds— by 50 basis points (bps) to 20%. One basis point is one-hundredth of a percentage point.
The central bank has maintained that it will wait and watch if inflation continues to hold the falling trend.
“We think RBI will maintain their neutral stance even while potentially cutting the repo rate by 25bps on 2 August. Beyond the 25bps likely rate cut, we think RBI will remain in a wait and watch mode to decipher how the inflation trajectory evolves from July,” wrote Kaushik Das, chief India economist at Deutsche Bank, in a note to clients on Wednesday.
July is when he expects the impact of higher housing rent allowances to government employees, the goods and services tax and higher food prices to start getting reflected in the inflation numbers.
Some economists say RBI won’t be in hurry to cut rates in the upcoming policy meet, given the looming threat of global uncertainty, including expectations of further rate hikes in the US and withdrawal of easy liquidity policies in the euro zone.
“I would want the RBI to cut rates aggressively because growth concerns are consistently outweighing inflationary risks,” said Rupa Rege Nitsure, group chief economist at L&T Financial Services. “But I am not entirely convinced if they will do so for variety of reasons. Most of the risks factors flagged in the previous policy—farm loan waiver, health of state finances, HRA (house rent allowance) implementation, rural wage growth, global uncertainty—hold true even now.”
A sharp contraction in capital goods production, indicative of investments in large industries drying up, is of particular concern. Capital goods output shrank 3.9% in May, compared to a 1.3% contraction in the previous month.
Output of the manufacturing sector decelerated to 1.2% in May from a 2.6% growth in April. Mining output contracted to 0.9% in May compared to a 4.2% growth in the previous month. Electricity generation, however, increased 8.7% in May compared to a growth of 5.4% a month ago.
Economists said that a rebound in industrial production could be around the corner.
“The latest IIP numbers signal continuation of a past trend where both consumer spending and private sector investments are down. From September onwards, we can expect production to increase both on the account of increased demand and re-stocking of commodities in the supply chain,” said Madan Sabnavis, chief economist at CARE Ratings Ltd.
Sabnavis said many retailers were destocking their inventory before the 1 July rollout of the goods and services tax, which led manufacturers to cut production.
Output of consumer durables such as cars and household appliances contracted 4.5% in May, compared to a 6% contraction a month ago.
Alekh Archana in Mumbai contributed to the story.