IIP rises, Retail Inflation falls

Industrial production growth picked up marginally in September to a three-month high and consumer inflation fell to record low, yet few would be willing to risk a wager on Reserve Bank of India Governor Raghuram Rajan cutting interest rates next month to stimulate the economy despite voices calling on him to do just that. Industrial growth recovered to a better-than-expected 2.5% in September from less than half-a-per cent in August, lifted by the high growth in usually volatile capital goods.
The separately released consumer price index (CPI) showed retail inflation slowed further to 5.52% in October, another low on the gauge that was launched in 2011, because of softer food and fuel prices.
Inflation is likely to head even lower with international crude prices falling further and the winter vegetable crop likely to push prices down, but growth indicators suggest consumer demand is still weak and the festival season has not provided any cheer.
Most experts think it's the right time to cut rates but expect Rajan to keep them unchanged well into 2015 even at the risk of friction with the new government that would look to an easier monetary policy stance to help strengthen the prospects of recovery after two years of growth below 5%.
RBI has set a target of bringing inflation down to 8% by January 2015 and 6% by January 2016 and has talked of breaking the back of inflation once and for all, rather than relenting too early in the war on prices. Some experts only expect Rajan to move on this front after the budget in February when a clearer picture emerges of the government's finances.
Rajan has left the key repo rate unchanged at 8% since January, when he had raised it by 25 basis points. The next monetary policy announcement will be on December 2.
Markets are piling on the pressure for a rate cut with bond yields heading lower while sluggish credit offtake has forced some banks to cut deposit rates.
Finance minister Arun Jaitley has favoured a cut in interest rates in the face of moderating inflation. At the World Economic Forum's India Economic Summit in Delhi last week, a number of industrialists called for lower interest rates. The Confederation of Indian Industry said that it hoped the decline in inflation “would propel the RBI to reduce policy rates in its forthcoming monetary policy especially as consumer demand continues to be tepid,“ adding that growth is showing early signs of revival.
Available evidence shows the economy possibly slowed in September from nine-quarter high GDP growth of 5.7% in the April-June quarter. Industrial growth has been low in the second quarter of FY15 ­ 0.41% in July, 0.48% in August and 2.5% in September.
Excise collections are down 1.2% in April-October from the year earlier, suggesting very weak manufacturing.Overall, indirect tax collections are up only 5.6% in this period.
Production of consumer durables contracted 11.3% in September, suggesting weak demand in the face of high interest rates and a lower rise in income. A 2.55% decline in car sales in October suggests the marginal recovery in September industrial production may not be sustained.
India Ratings has already trimmed its FY15 growth forecast to 5.6% from 5.7%, citing weaker industrial growth.
Manufacturing activity grew by 2.5% during the month, led mainly by the capital goods sector, which posted 11.6% growth after two straight months of contraction. Output in only seven out of 22 sub sectors contracted in September.
Even declining inflation and the festive season, which usually sees people loosening their wallets, could not revive consumer spending, as evidenced by consumer durables output dropping 11.3%.
Mining grew 0.7% in September and is expected to get better in the coming months based on the government's action plan to auction the 214 cancelled coal blocks and an ordinance to allow commercial mining in the country . This is turn will also have a positive effect on manufacturing and electricity . Electricity output rose 3.9% during the month.

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