Will the sharp slowdown in industrial growth reflected in the Index of Industrial Production (IIP) lead to second thoughts in the Reserve Bank of India (RBI) about the need for a rate hike?
That seems unlikely, given the central bank’s low opinion of the IIP data. In its mid-term monetary policy review, RBI said: “The high volatility over the past two months raises some doubts about how effectively the index reflects the underlying momentum in the industrial sector.”
The IIP numbers for August will reinforce that scepticism.
Nevertheless, other data too show a moderation in growth. These include the Purchasing Managers’ Indices for both manufacturing and services, the low growth in power generation and the relatively low demand for bank credit. The Organization for Economic Cooperation and Development composite leading indicator for India has been falling for months. This column has been highlighting several of these trends.
It’s worth underlining, though, that there’s no indication of any sharp slowdown. In fact, non-oil imports, an indicator of industrial growth, increased by 41% year-on-year in August. The HSBC Quarterly Index of economic conditions in emerging markets has weakened in the September quarter.
Stephen King, HSBC’s chief economist, has said it “suggests that the pace of economic recovery has faded more quickly in the emerging world than in either the US or the euro zone”. Yet, the report also said: “Of the major emerging market economies, only India maintained a robust rate of expansion, far outpacing other countries.” RBI will have to keep that in mind while formulating policy.
Graphic by Yogesh Kumar/Mint
Apart from the extremely volatile Capital Goods Index, growth in basic goods was somewhat lower and in intermediate goods slightly higher than in the previous month. Growth in the index for consumer durables continued to be strong in August, at 26.5% against 23.7% in July. The index for consumer non-durables, which has been weak for many months due to high inflation, has slipped into negative territory.
It’s another reminder that reining in inflation could be good for growth. The strong monsoon, too, may have had an impact on production.
Investors used the opportunity to book some profits and the fall in the Sensex on Tuesday was in line with the fall in other Asian markets. That suggests the markets share RBI’s qualms about the IIP data.