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Factory output growth slumps, putting RBI under rate pressure

Factory output growth slumps, putting RBI under rate pressure
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First Published: Fri, Nov 12 2010. 11 57 PM IST
Updated: Fri, Nov 12 2010. 11 57 PM IST
New Delhi: Industrial output growth in September slumped to a 16-month low of 4.4%, an unexpected slowdown that could make policymaking tougher for the Reserve Bank of India (RBI), which had said it wanted to hold off from further rate increases for the next three months at least.
A Reuters poll of 27 economists had arrived at a median estimate of 7%. Factory output was dragged down by the anaemic performance of the manufacturing and electricity sectors, which grew at 4.5% and 1.7%, respectively.
The use-based classification of Index of Industrial Production (IIP) showed capital goods contracted by 4.2% and consumer durables slowed to 10.9% during the month.
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“Now, both growth and inflation concerns are on the same keel,” said Samiran Chakraborty, regional head of research (India) at Standard Chartered Bank. “From a monetary policy perspective, it is more of a challenge.”
Recent developments, including Friday’s industrial output data, may add to RBI’s concerns as it tries to strike a balance between the objectives of spurring growth and reining in inflation.
As industrial momentum loses steam, the US Federal Reserve’s recent decision to expand money supply by $600 billion (Rs.26.8 trillion) over the next few months could add to pressure on inflation in India.
Friday’s industrial output numbers came in the wake of China’s inflation rate surging to a 25-month high of 4.4% in October. This, added to the factory slump at home, prompted Indian stocks to tumble.
“I am disappointed by these (IIP) numbers. We have got poor numbers for two consecutive months—August and September. As the finance minister (Pranab Mukherjee) has said, I think we need to take a careful look,” said T.C.A. Ananth, India’s chief statistician.
Despite two consecutive months of industrial growth, economists are not inclined right now to lower their economic growth targets for the year to 31 March.
On 2 November, RBI governor D. Subbarao chose to stick to the annual economic growth forecast of 8.5% despite the recent volatility in IIP data as other proxy indicators such as tax collections have been robust.
The Central excise collections for the April-September period increased by 40.7% to Rs60,834 crore. A part of the growth in excise collections was on account of a 2 percentage point increase in Central excise rates in the last Union budget.
Though other indicators have given mixed signals, two consecutive months of slowing industrial growth against the backdrop of an increase in global commodity prices has increased the possibility of more rate hikes by RBI.
“In the near term, we expect the Reserve Bank of India to keep policy rates on hold, but a continuation of the current uptrend in commodity prices suggests that RBI will end the rate pause sometime next year,” wrote economists Sonal Varma and Ketaki Sharma of Nomura Financial Advisory and Securities (India) Ltd, in a report on the implications of September’s IIP data.
Graphic by Yogesh Kumar/Mint
PTI contributed to this story.
sanjiv.s@livemint.com
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First Published: Fri, Nov 12 2010. 11 57 PM IST
More Topics: IIP | Economy | India | Manufacture | RBI |