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Lower inflation, dip in factory output raise rate cut hopes

13 Sep 2016

untitled-11-copyNEW DELHI: Retail inflation slowed to a five-month low in August as food prices softened, while industrial output contracted in July, raising expectations of a cut in interest rates when the Reserve Bank of India (RBI) meets early next month to review monetary policy. Data released by the Central Statistics Office (CSO) on Monday showed inflation, measured by the consumer price index (CPI), rose 5.1% — slower than the previous month's 6.1% rise. Retail food price eased to 5.9% in August, slower than the previous month's 8.4% increase. Rural inflation slowed to 5.9% in August from 6.7% in July, while urban inflation moderated to 4.2% from 5.4%. Food inflation slowed sharply in both rural and urban areas. The sharp rise in retail inflation in the past few months, fuelled by increase in food prices, had dashed hopes of any cut in interest rates. But robust monsoon rains may have helped in dousing food prices. Vegetables prices eased in August, while prices of cereals, meat and fish softened. Prices of pulses, sugar and confectionary remained pressure points and ruled at double digits. Economists said they expect the central bank to act on rates. "After RBI kept its policy rate unchanged at 6.5% at the August 9 meeting, this increases chances of a rate cut in October," ratings agency Crisil said in a note. "But RBI may wait for some more time before wielding the knife. We expect the average CPI to stay close to 5% this fiscal, assuming a favourable monsoon with adequate temporal and spatial distribution," the agency said. Separate data released by the CSO raised worries about the health of the industrial sector. Industrial output contracted by 2.4% in July led by a decline in manufacturing and capital goods and sluggish output in mining and electricity. The manufacturing sector fell 3.4% in July compared with growth of 4.8% in the same month last year, while the capital goods sector contracted 29.6% compared with growth of 10.1% in July 2015. Economists have raised doubts about the signalling ability of the data as it has remained volatile. "Although lead indicators had pointed to a slowdown in industrial growth, the contraction posted by IIP in July 2016 has come as a surprise, with the performance of manufacturing gloomier than anticipated. However, the steady 5.5-6% growth recorded by consumer durables in the last three months is a source of some comfort," said Aditi Nayar, senior economist at ratings agency ICRA.

By SanjayBansal | Founder & CEO | Affordable Homes India

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