Dismal April IIP: Is rate cut a given or is inflation key?

Moneycontrol Bureau

Well, it may spell some good news for investors on June 18, economists still think the disappointing industry output growth in April is worrisome. Industrial Production (IIP) growing at a marginal 0.1% in April has raised hopes for some investors looking for 50 basis points rate cut by the Reserve Bank of India (RBI) in its mid-quarter policy review.
So, what are economists expecting?
Batting for a 25 bps rate cut, Sajjid Chinoy of JPMorgan thinks the RBI will be very wary of further easing, because it had made clear, in the last review, that room for further easing after a 50 bps cut was very limited and nothing has fundamentally changed. He strongly feels that only policy actions can pump up growth in the economy.
Samiran Chakrabarty of Standard Chartered Bank too agrees that cutting interest rates is probably not the panacea as growth needs to be supported from all angles. "Rate cut is not going to be enough but a step which can be taken immediately. Whereas we know that the other kinds of steps which are required to push growth for well known reasons are getting delayed. We need a kind of combination of all policies to stimulate growth at this point in time," Chakrabarty elaborates.
Meanwhile, economists also feel that more than focusing on rate cut, RBI’s forward guidance is important. "Though 25 bps of rate cuts seems to be in the price. It will be important to see the forward guidance that RBI gives. In the last meeting they clearly said that there is a limited scope of further rate cuts, however this time market is expecting that even in their forward guidance they will turn dovish," Vivek Rajpal of Nomura adds. Inflation holds the key?
Most feel that inflation data expected on June 14 is likely to be decisive for the RBI’s monetary stance. Chinoy argues that if core inflation number surges by 40-50 basis points and head towards the 5.5% the RBI will be justifiably very wary.
"The inflation number will be crucial. Headline inflation is already above 7% and climbing. The all India CPI is in double digits. Let us not forget that the currency moving down by 10% over the last three months has already resulted in a significant monetary easing along with the 50 basis point cut 8 weeks ago so I am not so sure it is a done deal," Chinoy explains further.
However, Chakrabarty holds a somewhat different opinion as he believes inflation is unlikely to have too much of effect on the RBI policy. "The core inflation number where traditionally RBI should have more impact is coming down and that is not surprising given that 5.3% growth is much lower than what we think of potential growth to be about 7-7.5%. So it is probably with a lag that inflation is coming down," Chakrabarty says. India Inc reacts
Not so unsatisfied with the low IIP data, Venugopal Dhoot, CMD of Videocon is hoping that the RBI will interest rate will be reduced drastically. "So, far as Indian manufacturers are concerned, they are not worried whether the IIP number is high or not. If I am speaking about consumer durable whether IIP number is high or not, what we look is the marketing and marketing side we are getting the growth of 15%." Nasrin Sultana nasrin.sultana@network18online.com