Retail inflation falls, IIP at 5-mth low: Will RBI's Rajan cut rate before next policy?

The slowdown in the Index of Industrial Production (IIP) numbers to a five month low of 2.1 percent is a reminder to the Narendra Modi administration that acceleration in economic growth can happen only when the government puts money on the table, which would then be followed up by the private sector. The reason for muted corporate earnings (an analysis of annual results of 396 companies by SBI research shows decline in revenue of 7 percent and PAT of 6 percent y-o-y) can be attributed to absence of fresh investments. The Modi government, which has initiated work on multiple fronts to ease business environment, has indeed promised to increase public investments in crucial areas such as roads and infrastructure. [caption id=“attachment_2241264” align=“alignleft” width=“380”]  Reuters[/caption] If the government walks the talk, some improvement in the growth scenario can happen over the next six months to one year and private investors would come into the scene when they see the government acting on its promises. For now, there is not much improvement in the growth scenario on the ground. Even though, on a cumulative basis, the IIP growth for the fiscal year 2015 grew 2.8 percent as against a contraction of 0.1 percent in fiscal year 2014, this growth is partly due to a favourable base effect. On the other hand, retail inflation continues to fall, obliging to the gliding path envisaged by the Reserve Bank of India (RBI). In April, consumer price index fell to 4.87 percent from 5.25 percent in March, mainly on account of a fall in the prices of food items. Retail inflation is largely expected to stick to the declining trend in the ensuing months. Eventhough the impact of a projected poor monsoon is a potential threat to food, vegetable items this impact may not be severe since the rural demand is weak. “Even though expectation of a less than normal monsoon looks a possibility, this may not result in spike in food prices, with rural economy continuing to see a loss of purchasing power with wage payments under MGNREGA declining by 15 per cent in FY15. The increase in crude prices may not also have a cascading impact on retail inflation trajectory (fuel inflation contribute to a 15% decline),” SBI economists said in its report. Given the time consuming nature of the government spending, for now, the onus to give some respite to the economy falls on RBI governor Rghuram Rajan. At this stage, when inflation is a contained danger, supporting growth should be a bigger concern for the central bank. Rajan, who has cut the central bank’s key lending rate to banks, repo, by a total of half a percentage point this year, is likely to offer a third rate cut by quarter basis points in its next monetary policy review scheduled in the first week of June. One shouldn’t be surprised if the rate cut comes much earlier than that. (Data support from Kishor Kadam)