RBI policy: Economists expect a 25 basis points cut tomorrow

Even as IIP forecast for June remains dim and retail inflation remains sluggish, calls for long term

With manufacturing activity contracting and retail inflation slowing, the Reserve Bank of India (RBI) will be hard pressed to announce a rate cut of at least 25 basis points in the upcoming Monetary Policy meeting.

Activity in the manufacturing sector, measured by the widely tracked Nikkei purchasing managers’ index (PMI) survey, has contracted in July for the first time since December when demonetisation induced slowdown made the sector contract.

However, in July, the contraction is much severe as PMI registered an eight and a half year low of 47.9 points. A reading above 50 indicates expansion; while one that is below that shows contraction.

“While we expect the RBI to cut down rates by atleast 25 basis points, the willingness of the banks to pass on that to the consumers will show whether the move bears any result,” Devendra Pant,  Chief Economist at India Ratings said.

While a rate cut would have an immediate impact on the consumer side with consumer durables, auto and housing sectors getting a boost, long term solution would be to improve the complete cave in of the industrial demand, Pant added.

GST confusion behind historically low PMI

A shoddy implementation of GST is responsible for the latest PMI numbers, which led to outputs, new orders and purchasing activity all seeing the steepest fall since early-2009, Pollyanna De Lima, Principal Economist at IHS Markit and author of the report said.

“Manufacturing growth in India came to a halt in July, with the PMI down to its lowest mark in almost eight-and-a-half years amid widespread reports that the sector has been adversely affected by the implementation of the goods and services tax,” she added.

PMI had first taken a hit in growth in the previous month of May when the index fell to a three-month low of 51.6, compared to 52.5 in April and in March.

Lima expects the RBI to change its policy stance in the coming months from the present ‘neutral’ to ‘accommodative’, to spur the economy.

In July, however, even as factories cut selling prices, a lack of clarity among producers on the new tax system reduced output sharply. As demand remained weak, firms in turn again reduced output charges even as input costs rose.

Low retail inflation

Based on this, economists said retail inflation - which fell to a five-year low of 1.54 per cent in June - is expected to remain subdued over the coming months.

This will add pressure on the Monetary Policy Committee of the RBI which is meeting on Tuesday and Wednesday to cut rates, Pant said.

Sluggish industrial production growth

Added to this, the government’s own IIP figures, which has a lag of two months showed a low growth of 1.7 per cent in May. It had been 3.1 per cent in the previous month of April when economists had stated that the lagged effects of demonetization still held sway.

The forecast for the upcoming data for June is also expected to be dim, Pant added.

Economists said the government has a tough job ahead with reviving industrial investments which can be revived only once banks manage to clean up their balance sheets and are financially healthy again.

The latest available gross domestic product data, also showed manufacturing growth falling to 5.3 per cent in the fourth and final quarter of 2016-17. As Demonetisation was considered to be a prime reason.