August IIP fall may not influence RBI on rates

The growth of industrial production in the month of August remains in the broader trend of the annual growth, even though it shows a sharp drop from the previous month and is also lower than the average expectations, analysts say.

The Index of Industrial Production (IIP) grew 5.6 per cent in August, compared with a revised 15.2 per cent in July. The sharp rise in July was mainly because of a growth of the capital good segment, say analysts. If capital goods is removed from the IIP, the growth in August would be 6.8 per cent, compared with 7.2 per cent growth in the previous month, says Veena Mishra, chief economist at the Mahindra Group.

The growth of IIP was 10.6 per cent between April and August. Followed by moderation in growth in the second quarter, it could lead to a yearly growth in industrial production of about 8.5-8.8 per cent, said Mishra. Moderation in the second half could be because of 14.3 per cent growth in the comparative period a year earlier and some impact of a rise in interest rates, she said.

“There was no reason to be exuberant last month and there is no reason to be depressed this month,’’ said Dharmakirti Joshi, economist at Crisil Ltd in Mumbai. “The underlying trend is towards moderation in growth in the second half.’’

Joshi, who forecasts 8.2 per cent growth in Gross Domestic Product (GDP) in the year to March 2011, expects the Reserve Bank of India to raise its key rates by 25 basis points in its November monetary policy review. “RBI will focus on inflation and other parameters before deciding on rates,’’ he said.

The latest data doesn’t change the forecasts, said Anubhuti Sahay, economist at Standard Chartered Bank, who predicts a rise in GDP of 8.1 per cent in the year to March and 8.5 per cent industrial growth. Sahay expects the RBI to raise both its key rates by 25 basis points in November and another 25 bps in the first quarter of 2011.

“We think the low industrial production print should not dissuade the RBI from its primary objective of dealing with high and persistent inflation, elevated inflationary expectations and rising asset prices,” said a note by Tushar Poddar, economist at Goldman Sachs. It added that RBI would be likely to raise policy rates by another 75-100 basis points by end-June 2011.

RBI should hold its rates if inflation declines, according to a note from Barclays Capital.

Mishra from Mahindra wants the central bank to stop raising its rates. The inflation rate rose mainly because of primary articles and energy costs, as also supply side factors, over which the RBI has little direct influence.

With the global growth environment likely to remain weak for an extended period and inflation likely to decelerate in line with RBI’s trajectory, we think RBI is close to the end of its current tightening cycle, said Ashutosh Datar, an economist with IIFL.