March IIP data very disappointing: C Rangarajan

India's Index of Industrial Production (IIP) unexpectedly contracted 3.5% in March.

In an interview to CNBC-TV18, C Rangarajan, chairman of Prime Minister's Economic Advisory Council (PMEAC) says, it is very disappointing. “One had not expected such a sharp decline in the industrial production,” he adds. According to him, the Reserve Bank of India (RBI) will not only look at the numbers relating to industrial production, but will also look at the numbers relating to inflation. “If inflation shows signs of decline in the coming weeks or in the coming months then the RBI has greater maneuverability. But if inflation continues to persist at a very high level and doesn’t show any sign of decline then the monetary authority has a very difficult choice to make,” he asserts. Also read: Don't expect economy to recover until H2FY13, says Pronab Sen  Below is the edited transcript of his interview on CNBC-TV18. Also watch the accompanying video. Q: IIP has come as quite a shocker, 3.5% contraction for the month of March, does it shock you? Does it postpone the expected recovery? A: I think it is very disappointing. One had not expected such a sharp decline in the industrial production. One had thought that there was a weakening, as far as growth is concerned, but not negative growth rate. So, we need to look at the data more carefully. The capital good sector has shown a very steep decline. The numbers relating to this sector have been fluctuating from month to month. Therefore, we need to examine very carefully the underlying data before reaching any conclusion. But anyway overall the picture that has emerged is disappointing. Q: Where does this leave the RBI? You had pointed out last time, the RBI said that they have very limited room to cut rates, but this looks like a growth story that is seriously decelerating. A: Obviously, the RBI will look at both sets of factors. They will look at the numbers relating to industrial production, but they will also look at the numbers relating to inflation. Therefore, if inflation shows signs of decline in the coming weeks or in the coming months then the RBI has greater maneuverability. But if inflation continues to persist at a very high level and doesn’t show any sign of decline then the monetary authority has a very difficult choice to make. Q: Inflation number will come out on Monday. In your  personal opinion, how do you see inflation pan out, considering that we have seen a reduction in Brent crude prices globally as well? A: It is very difficult to forecast, after all last month one didn’t expect the food inflation to climb up as much as it did. But hopefully it should come a little below 6.7%. It was at 6.9% or close to 7% last month. It could come down a little below that, but not very much below. Q: Your sense is that perhaps the headroom for the RBI has increased somewhat to be able to move on rates, with the growth numbers looking so bad, quite clearly indicating that pricing power will also decline with this. A: It is a combination of both sets of factors, which will have to be taken into account. Perhaps a sharper decline in inflation, if at all it happens, will give greater room for the RBI to act. Otherwise, it is a very difficult dilemma. Q: The RBI’s position had been that aggregate demand is getting fueled by a fiscal deficit that keeps increasing without hindrance and no concrete steps to bring that down. Would you predicate an RBI move only after something has been done to bring down the fuel subsidies? A: I think the government is quite serious in bringing the fiscal deficit or maintaining the fiscal deficit at the budgeted level. Action will be taken. The timing depends upon the various sets of factors. But the RBI should act in the belief that the government will take action. Q: We saw those measures undertaken by the RBI in the rupee yesterday, but we have seen the rupee spike back up at around 53.57 and even post its intraday low of around 52.9 yesterday. What is your opinion on the rupee? A: The rupee has weakened because of the fact that the current account deficit continues to remain at a high level and the capital flows have been somewhat erratic. Therefore, to some extent, the volatility in the capital flows has been responsible for what is happening to the rupee. Perhaps the current account deficit this year will come down as the April numbers seem to indicate. But if capital flows remain erratic and if the capital flows are not adequate, then it will have an impact on the rupee.