IIP surprise, inflation spike not likely to stop RBI from cutting rates

Mumbai: Analysts at leading foreign brokerages like Credit Suisse and Barclays have said the marginal uptick in IIP number and a spike in retail inflation would not deter the RBI from cutting lending rates by 25 basis points at its March 19 policy review.

Credit Suisse Director Robert Prior-Wandesforde in a note said he still expects the monetary authority to slash the repo or short-term lending rate next Tuesday.

[caption id=“attachment_658014” align=“alignleft” width=“380”]  Image for representation only. Reuters[/caption]

“We doubt that either of today’s data releases (IIP and retail inflation) will prevent the RBI from cutting the repo (and cash reserve ratio) by another 25 bps 19 March, while we are also looking for a 25 bps reduction on 3 May,” Prior-Wandesforde said.

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Explaining the rationale for this optimism, he said the disappointing Q3 GDP data of just 4.5 per cent, and the fact that Finance Minister P Chidambaram has stuck to his budgetary commitments are likely to carry more weight in the context of a WPI rate, which is trending lower.

While the January industrial production rose 2.4 per cent mainly due to perk up in manufacturing output and enhanced power generation, against 1 per cent a year ago, the retail inflation rose to 10.91 per cent in February from 10.79 per cent in January, dampening markets, which shed 0.41 per cent or 81 points today.

For the April-January period of this fiscal, the IIP print stands at a poor 1 percent, down from 3.4 per cent a year ago.

However, the RBI mostly bases it inflation reading on the wholesale price numbers, which have been trending down for the past many months now. The latest reading stood at 6.62 per cent in January. The February readings will be out on Thursday.

Joining him, his counterpart at Barclays India said he too expects a 25 bps cut in the repo rate on Tuesday.

“We expect 25 bps repo rate cut next week, as the seemingly better IIP print today does not weaken the case for a March easing by the RBI,” Barclays India Director and Chief Economist Siddhartha Sanyal said in a note.

On the IIP readings, Sanyal said though the IIP print came slightly above the market expectation, the overall trend still remains that of low single-digit y-o-y growth prints for IIP, which is considerably weaker than its longer-term trends.

He also noted that Q3 GDP numbers at 4.5 per cent was driven by a massive drop in government spending.

The government spending growth slowed to 3 per cent during the September-January period, against 20 per cent a year ago.

It has also lowered its growth projection to 5.2 per cent this fiscal and to 6.2 per cent next fiscal and that the recovery in FY14 will also remain back-loaded.

On the RBI worries about the high current account deficit which stood at 4.65 in the first half of this fiscal, Sanyal, though the CAD will likely remain elevated in the near term, the unfolding growth-inflation dynamics should remain overpowering for the upcoming rate decision of the central bank.

“We factor in a calibrated 25 bps reduction in the repo rate on March 19,” he said.

On the rising consumer price based inflation, he said it remains broadly flat, and hence should not be a stumbling block for rate cut.

On the IIP numbers, Prior-Wandesforde said, the final print came in as a modest upside surprise, returning to positive territory in January after consecutive year-on-year declines.

However, he said, “we suspect the recent underlying improvement has more to do with better export than domestic demand as the latter continues to feel the pressure from the government’s intense spending squeeze in the second half”.

Exports registered their first year-on-year increase in January and extended this gain to just over 4.2 per cent in February, giving rise to a substantially smaller trade deficit than generally anticipated.

“According to our modelling, it takes around 18 months for a weaker exchange rate to impact exports and it is now about 18 months since the depreciation began. As such, we are hopeful that the export recovery will continue over coming months, as the country grabs global market share, boosting industrial production further,” Prior-Wandesforde said.

PTI