New Delhi: All eyes are now on the Reserve Bank of India (RBI). Will it or will it not cut rates at its next meeting?

Separate data released by the government on Wednesday showed that consumer price inflation had decelerated further and factory output grown marginally, suggesting that inflation had peaked out and a nascent industrial recovery may be underway.

India’s index of industrial production (IIP) expanded by 2.5% in September after anaemic growth in the preceding two months and retail inflation moderated to 5.52% in October, compared with 6.46% in September, mainly on account of easing vegetable and fuel prices.

The government, which is focused on faster economic recovery, has already signalled that a rate cut would be timely.

The markets rose to new records in anticipation of the favourable data, released after trading hours.

The BSE Sensex rose 0.35% to 28,008.9 at the close and the National Stock Exchange’s Nifty gained 0.25% to 8,383.3, paced by rate-sensitive stocks like banks on hopes that easing inflation would allow RBI to cut rates.

India’s gross domestic product (GDP) grew less than 5% for two consecutive years. The government expects the economy to grow around 5.8% this fiscal year and around 6-6.5% in the following year. GDP growth was 5.7% in the quarter ended 30 June.

Faster economic recovery is key for job creation—one of the main election promises of the Bharatiya Janata Party-led National Democratic Alliance, which is due to complete six months in office later this month.

The IIP data released by the statistics ministry showed that manufacturing grew 2.5% in September, electricity production 3.9% and mining output 0.7%.

Output in the volatile capital goods sector, a key indicator of investment demand in the economy, rose 11% after contracting for two consecutive months. Consumer goods output contracted 4%, mainly on account of an 11% fall in consumer durable goods production.

Economists said sluggish manufacturing growth could pull down GDP growth in the second quarter to around 5%.

In a recent interview to Mint, finance minister Arun Jaitley flagged patchy manufacturing growth and high interest rates among the downside risks to the economy.

“I think interest rates now need to be moderated. That is one important factor. Inflation has been helped by both moderation of food prices in India and also the global oil prices," he had said. “And I do hope the RBI bears this in mind."

The August IIP number was revised upwards to 0.5% from 0.4%.

Industry is hopeful that slowing retail inflation would spur RBI to reduce policy rates as consumer demand continues to be tepid, said Chandrajit Banerjee, director general of the Confederation of Indian Industry (CII), a lobby group.

“We hope that going forward, the tentative signs of revival would transform into a firm recovery as overall business confidence is looking up and there is optimism about the change in governance conditions pertaining to the ease of doing business," he said in
a statement.

The Narendra Modi government has announced a number of steps to boost manufacturing in India, including allowing higher foreign direct investment in defence manufacturing and railways, as well as launching the ‘Make in India’ campaign. It has also moved to kickstart stalled projects.

Jaitley, speaking at an event organized by the commerce ministry in association with CII, said the government was taking steps to aid manufacturing.

“I still find in merchandise products, our cost of capital, or labour regime, our infrastructure, the improvements which are required in our trade facilitation—these still have to be assisted in order to bring down the prices of our manufactured products," he said. “And as part of ‘Make in India’ campaign, these are special areas which we will have to address and address very soon. We are in the process of doing so," he said.

Weak manufacturing growth has also eroded tax collections, with indirect tax collections increasing only 5.6% to 2.85 trillion in the April-October period, mainly on account of a contraction in excise duty collections, putting further pressure on the fiscal math of the government.

Excise collections have contracted by 1.2% in the seven-month period on account of weak growth in the manufacturing sector, data released by the finance ministry on Wednesday showed.

Although retail inflation is likely to come down in the current month as well, due to a decline in domestic fuel prices and easing global commodity prices, it may rise again in the next calendar year, said Aditi Nayar, senior economist at rating agency Icra Ltd.

“As the base effect wears off, CPI inflation is expected to revert to 7% in February-March 2015, suggesting a low likelihood of rate cuts in the next two policy meetings," she said.

In October, food inflation fell to 5.68% from 7.56% in September, while fuel inflation was at 3.29% against 3.45% in September.