Easing IIP, inflation just made Raghuram Rajan's life a tad bit easier

India’s industrial production unexpectedly rebounded in July while consumer inflation cooled last month, offering some relief for policymakers who have been battling the country’s worst economic crisis in more than 20 years.

Industrial output rose 2.6 percent in July from a year earlier, its first expansion in three months, lifted by a robust rebound in capital goods production - often seen as a barometer for investments in Asia’s third-largest economy.

A Reuters poll had forecast output would shrink by 0.8 percent. India also revised industrial output in June to show a smaller decline of 1.8 percent year-on-year, versus 2.2 percent in the provisional data.

The pickup in output in July will make life slightly easier for Raghuram Rajan, the new governor of the Reserve Bank of India (RBI), whose capacity to shore up slowing economic growth is being hindered by high inflation and a battered rupee, which has fallen to record lows against the dollar.

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Rajan is due to hold his first interest rate meeting on September 20, two days after the US Federal Reserve concludes a monetary policy meeting, which could affect the rupee.

Retail inflation slowed to 9.52 percent in August from 9.64 in July, data showed on Thursday, although private economists were skeptical that it pointed to a better overall outlook.

“Industrial production and consumer inflation are both better than expected and provide comfort,” said Anubhuti Sahay, an economist at Standard Chartered Bank.

“However, the broad macroeconomic picture of weak growth and high inflation still remains the theme,” she said.

C. Rangarajan, the prime minister’s chief economic adviser, said Thursday’s data was in line with the government’s forecast that the economy will pick up later in the 2013/14 fiscal year.

[caption id=“attachment_1106251” align=“alignleft” width=“380”]  The weak rupee, which has plunged 16 percent against the dollar since June 1, has pushed up inflation and strained the national budget as the costs of imported items like oil, fertilizer and other important commodities have risen.Reuters[/caption]

“The second half of the year must pick up … I believe this is the new trend as far as industrial growth,” Rangarajan told CNBC-TV18.

The weak rupee, which has plunged 16 percent against the dollar since June 1, has pushed up inflation and strained the national budget as the costs of imported items like oil, fertilizer and other important commodities have risen.

The currency has been hit by investor concerns about India’s record high current account deficit, which hit 4.8 percent of GDP in the year ended March 31, and concerns that India, along with other emerging markets, will see reduced capital inflows once the U.S. Federal Reserve starts to trim its stimulus programme. Markets expect the Fed could decide to start scaling back stimulus as soon as at its meeting next week.

EASING INFLATION

The RBI’s defence of the rupee through a liquidity squeeze has driven up borrowing costs for Indian companies and prompted private economists to cut economic growth estimates for the current fiscal year to as low as 3.7 percent. That would be the lowest growth since 1991/92 and well below last year’s 5 percent expansion.

Government economic adviser Rangarajan said he expected further improvement in inflation thanks to good summer rains.

“I believe food inflation will trend downwards and that may have an impact on the CPI in the coming months,” he said.

Rangarajan is due to release a revised economic outlook for 2013/14 on Friday.

India’s manufacturing sector, which constitutes about 76 percent of industrial production, grew 3.0 percent in July from a year earlier, its fastest growth since March, the federal statistics office said.

Capital goods production rose for the first time in four months in July, posting annual growth of 15.6 percent. The rebound in the sector was mainly driven by a nearly 84 percent jump in the production of electrical machinery and apparatus.

Reuters