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Rate cut after IIP surprise?
Fri, 14 Dec Pre-Open

The Indian government which has been blamed for the slowdown in the Indian economy finally heard some good news. A big surge in manufacturing output pushed India's industrial growth to its highest in more than a year in October, a sign that Asia's third largest economy may have turned a corner that strengthens the central bank's case against a rate cut.

The index of industrial production (IIP) grew 8.2 % annually in October, as per the data released by the Central Statistics Office. However at the same time, retail inflation (consumer price inflation (CPI)) rose to 9.90% in November, from 9.75% in October. The turnaround in industrial output, which contracted a revised 0.7% a month earlier, was helped by a revival in infrastructure development, where the government has been trying to clear red tape restraining large projects.

By all accounts, the IIP figure will come as some relief not just to corporate India, which has been under stress as industrial activity and output have fallen, but doubtless also to RBI which has been fending off constant calls for a rate cut, even as inflation remains sticky and well above the central bank's comfort zone.

The IIP data shows positive development in the manufacturing sector. The Reserve Bank of India (RBI) has kept interest rates on hold since April because of stubborn inflation, defying calls from business and politicians for help in fighting a slump that has dragged the economy toward its slowest growth in a decade. CRR cuts have been the policy adopted under growing inflation, enabling banks to have more funds for lending to industrial projects. This is aimed at providing the much required stimulus to production. Also, the government's policy reform measures to boost investor confidence and attract more foreign investment is likely to bring more relief to the economy. The RBI is likely to leave key policy rates unchanged at its mid-quarter monetary policy review next week, but may introduce some liquidity measures to support growth.

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