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Reuters

Slump in factory activity, falling inflation may prompt RBI to cut rates

12 May, 2015

Industrial output eased in March to 2.1 per cent, weighed down by a slump in core industries while inflation cooled further in April to sub 5 per cent level fueling expectations of a rate cut in June, according to data released by Ministry of Statistics and Programme Implementation (MOSPI) on Tuesday. 

The figures related to the Index of Industrial Production (IIP) showed that growth at 2.1 per cent was lower than the median of 2.8 per cent as projected by a survey of 19 economists conducted by VCCircle a week ago.

Data released earlier this month for eight core industries which comprise nearly 38 per cent of the weight of items included in IIP highlighted that the index charted into negative territory as four of the eight industries experienced contraction. 

All the three major sectors in IIP—mining, manufacturing and electricity—witnessed a decline in March. The mining sector saw a slowdown in activity to 0.9 per cent against 2.5 per cent growth in February with manufacturing sector also slowing down to 2.2 per cent against 5.2 per cent in February. Electricity generation too lost momentum growing at just 2.0 per cent.

In terms of industries, 13 of the 22 industry groups in the manufacturing sector showed positive growth during the month.

Along with core industries, slumping exports and a decline in auto sales have tapered industrial output over the past year. Exports have been sliding since September on account of weak global demand and fell by 21 per cent in March. A combination of both domestic and global factors has been weighing down on the industrial growth. The cumulative growth for the IIP for 2014-15 stood at 2.8 per cent. 

Meanwhile, consumer inflation also cooled down further to 4.87 per cent compared with 5.17 per cent in March on account of lower food prices. 

Consumer food price index eased to 5.11 per cent in March, down from 6.14 per cent in February, according to official data.  

Unseasonal rains which destroyed majority of rabi crops in the country has had limited impact on food prices. But the upside risks to inflation are high in the coming months as the increase in crude prices coupled with low monsoon predicted by IMD can play spoilsport.

Brent crude futures, though still below the $100 mark, have increased 40 per cent since the start of the year. Indian oil companies have already increased the price of diesel and petrol a fortnight ago to adjust for the rising prices. They may have to realign prices again with the further spurt adding to inflation woes.

For now, the slump in factory activity coupled with low inflation numbers may prompt the RBI to slash rates further. RBI has already cut rates by 50 bps in two rounds this year but the benefits are still to translate into real economy. 

RBI is expected to meet for the second bi-monthly review on June 2.


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Slump in factory activity, falling inflation may prompt RBI to cut rates

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