Core sector, PMI, export growth all down in Oct; but with food inflation cooling, more calls for RBI to ease foot on brakes.
A day after dismal GDP numbers were issued for the second quarter of this financial year, the macro economy continued to get muted growth data on Thursday. However, there is a kind of comfort in terms of declining food inflation numbers, to a four-month low of eight per cent for the week ended November 19.
Food inflation has continued to decline after Diwali, by a little over one percentage point for a third week in a row. This should help the Reserve Bank of India (RBI) decide to concentrate on boosting growth by pressing a pause button on its tight monetary moves.
While the second quarter GDP growth was down at a nine-quarter low of 6.9 per cent, day two also had disappointing data in the form of dismal October export growth and a falling HSBC Purchasing Managers’ Index (PMI) for the manufacturing sector in November.
As reported earlier, the growth index of eight core industries showed stagnation, up by just 0.1 per cent in October. GDP data showed a decline in investment rate growth in the second quarter. With the RBI having raised policy rates 12 times between March 2010 and this September, economists say it’s time for the central bank to review monetary policy.
TRADE DEFICIT WIDENS
The trade deficit in October hit a four-year high of $19.6 billion, as merchandise shipments from India witnessed a sharp decline in growth rate to 10.8 per cent, at $19.9 bn, from 36.4 per cent in September and a peak of 80 per cent in July. Imports grew a steady 21.7 per cent, to $39.5 bn. The balance of trade in the first seven months of the financial year (April-October) also reached an unprecedented, negative, $93.7 bn.
CARE Ratings’ chief economist Madan Sabnavis said the depreciating rupee would not really help in boosting exports, due to the euro zone crisis. However, import bills would go up, widening the trade deficit.
During the period, exports reached $179.8 bn, growing 46 per cent year-on-year. Imports touched $273.5 bn, growing 31 per cent over last year. “This is very serious. We will breach $150 bn in trade deficit (for the year). The high level of trade deficit is not because imports are growing, but because exports are falling,” commerce secretary Rahul Khullar had said at the release of the initial numbers.
Exports across all sectors have seen a decline compared to the previous months, while imports have remained stable.
HSBC’s PMI for manufacturing declined to 51 points in November from 52 in October on the back of a weak rise in new business, delays caused by power cuts and increase in input and output costs. November data also signalled a fourth consecutive fall in manufacturing employment.
Leif Eskesen, chief economist for India and Asean at HSBC, said economic activity in the manufacturing sector continued to grow at a slower clip. However, “Despite this, manufacturers still struggle to keep up with new orders.”
INFLATION & RBI
Food inflation, on the other hand, was down for the week ended November 19 from 9.01 per cent last week, on the back of cooling in vegetables. “It is not surprising that inflation numbers are falling, as this is a kharif harvest season and we can expect the fall to continue through December or January. RBI should go for a rate hike pause, as inflation is falling,” Sabnavis said.
However, Siddharth Shankar, director of financial services firm KASSA, expected RBI to cut the cash reserve ratio rule, instead of its policy rates. “Going forward, I feel RBI will ease liquidity in the market by reducing the CRR. This will help in easing the crunch in the system,” he said.
On the other hand, the inflationary pressure was maintained in fruit and protein-based items like milk and eggs, meat and fish.
Overall inflation has remained over nine per cent for 11 months in a row till this October. The impact of food inflation on overall inflation would be a key factor in deciding RBI’s moves, analysts said.
Food inflation has a little over 14 per cent weight in the Wholesale Price Index, on which inflation data is based.
YES Bank chief economist Shubhada Rao believes RBI will pause in its interest rate tightening, not cut the rates till the end of the first quarter of 2012-13.
