BW Communities

Industrial Output Signals RBI Near Pause

BW Online Bureau Nov 08, 2014

<?xml version="1.0" encoding="UTF-8"?><root available-locales="en_US," default-locale="en_US"><static-content language-id="en_US"><![CDATA[India's industrial output growth slumped to 3.3 per cent in July, its weakest annual pace in nearly two years, reinforcing expectations the RBI will pause its monetary policy tightening after one more rate rise this week. The output growth was much lower than 6.2 per cent forecast in a Reuters poll and added to the Reserve Bank of India's dilemma of combating inflationary pressures without further stifling economic growth. But analysts argue that data on Wednesday, which is expected to show inflation pushing towards 10 per cent, will sway the RBI to raise rates on Friday for the 12th time since March 2010, before it takes stock. "We expect the RBI to continue its tightening stance on September 16," said Shubhada Rao, chief economist of Yes Bank in Mumbai. "There is a case building up for a pause thereafter." Indian stocks fell and the rupee slipped to its lowest level in more than a year on worries over the health of an economy that grew in April-June at its slowest annual pace in six quarters. The euro zone's deepening debt crisis and worries about the health of the US economy have rattled world markets, adding to the domestic concerns of Indian policymakers and another reason for the central bank to pause its tightening. This is similar to China, where economists argue the central bank will hold off on further monetary policy tightening after nine increases in bank reserve requirements and five rate rises since October, as inflation is peaking and economic growth is slowing down. For India though, inflation will remain a problem for a few months more, said the chief economic adviser to the finance ministry, Kaushik Basu. "Inflation is going to be very close to 10 per cent (for the month of August)," he said on Monday. "We are expecting inflation to remain very difficult till the month of November, maybe December and then begin to slow down." India's headline inflation was 9.22 per cent in July. The median forecast of a Reuters poll suggested Wednesday's data will show it picked up to 9.6 per cent in August. The central bank has maintained that it has to fight inflation even at the cost of a loss of some economic growth. Most analysts in a Reuters poll expect the RBI to raise its repo rate on Friday by 25 basis points to 8.25 per cent. Still, the weak industrial output figures and global economic concerns have increased the risk that the central bank skips a rate rise this week, some analysts said. Other data, including an Indian purchasing managers' index and car sales have also suggested the rise in interest rates is weighing on the economy. "Our base view is for a 25 bps rate hike by the RBI this week. But the probability of a pause has increased due to global uncertainty," said Kumar Rachapudi, fixed income strategist at Barclays Capital in Singapore. Stocks Rattles, Rupee Slides BSE Sensex extended losses after the data and closed the day down more than 2 percent. The rupee weakened to its lowest in more than a year. India's 5-year swap rate fell 6 basis points (bps) after the data to 6.59 per cent and the 1-year rate slipped 4 bps to 7.51 per cent. The 10-year benchmark bond yield fell 1 bp to 8.26 percent. July's industrial output growth was the weakest since October 2009. Overall industrial output growth was dragged down by a 15 per cent decline from a year earlier in capital goods production, the government data showed. In June, capital goods rose 38 percent from a year earlier. Annual growth in production of consumer goods and consumer durables rose compared to June, indicating consumer demand is still holding up somewhat in the face of rising interest rates. Some cautioned that such high volatility raised doubts about the reliability of the data. "We think that this data cannot be a credible guide to RBI policy. Inflation will continue to hold the key for the September rate decision," said A. Prasanna, an economist with ICICI Securities Primary Dealership in Mumbai. Manufacturing output , which constitutes about 76 per cent of the industrial production index, rose 2.3 per cent over a year earlier. Weakness in the West is taking a global toll on manufacturing. South Korea's manufacturing sector shrank in August for the first time in 10 months as new export orders decreased, while China's manufacturing sector contracted slightly for the second consecutive month. (Reuters)