StatsGuru-15-July-13

IIP numbers put pressure on Reserve Bank to cut rates

With the release of the Index of Industrial Production on Friday, pressure has only increased on the Reserve Bank of India to cut rates. The IIP, which seemed some months ago to be recovering and heading to over four per cent growth year-on-year, has dipped below zero since, as Table 1 shows. And the effect on the broader economy continues to be great, with quarterly GDP growth below 5 per cent year-on-year for two quarters in a row now, as Table 2 shows.

However, the RBI has shown itself to be more concerned about inflation. This, as Table 3 shows, has fallen in many components of late. Wholesale inflation has dipped sharply to below five per cent, and manufactured-goods inflation to barely three per cent. But food inflation has gone up in the past few weeks, ensuring that retail inflation remains high. The relative weight of the WPI and the CPI in the RBI's mind will make a big difference.

Nor are other signs all propitious. The rupee's quick depreciation against the dollar, shown in Table 4, means that imports will definitely have an inflationary effect, particularly in terms of fuel prices. And, as Table 5 shows, the fact that US treasury bills have seen better yields in the past few months suggests that further external weakness cannot be ruled out. On the other hand, the RBI can stop worrying as much as it did earlier about the transmission of rate cuts. Credit and deposit growth had been diverging for some time, as Table 6 shows, making it difficult for banks to cut lending rates. But that trend may now have reversed.(Click here for tables)