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Economy Jul 12, 2012

Higher-than-expected IIP unlikely to provoke a rate cut

India's industrial production grew at a higher-than-expected pace of 2.4 percent in May driven by manufacturing output, government data showed on Thursday.

Analysts had expected a rise of 1.8 percent in May output, a Reuters poll showed.

Along with June wholesale price inflation, scheduled for Monday, the notoriously volatile IIP data could be instrumental for the Reserve Bank of India to take a call on the rate cuts at a policy review on July 31.

Following are the comments from various experts on the IIP data

LEIF ESKESEN, CHIEF ECONOMIST FOR INDIA AND ASEAN, HSBC, SINGAPORE

"Today's factory output number is unlikely to change the stance of the Reserve Bank of India one way or the other. Both global and domestic parameters has largely remained same since its last meeting.

Industrial growth is still very sluggish and the April revision suggests that there is a prospect of downward revision in May number as well. Reuters

"The room to cut rates is limited because the slowdown is supply-driven, and it will not help much to ease policy rates. Implementation of supply-side reform measures are key for inflation-growth trade-off."

RADHIKA RAO, ECONOMIST, FORECAST PTE, SINGAPORE

"May industrial production marks some improvement from month and year ago, though reliability of the series remains in doubt after modest growth in April's output was revised down to -0.9 percent. Notwithstanding the volatility, we expect elevated input prices and still high borrowing costs to impinge on manufacturing activity in the year, with the latter unlikely to receive a significant boost until investment sentiments and demand conditions recover in a sustained fashion. Policy direction meanwhile will be dictated by June WPI and above 7.0 percent print will squash rate-cut hopes at the end-July review."

SURESH KUMAR RAMANATHAN, HEAD OF REGIONAL INTEREST RATES AND FX STRATEGY, CIMB, KUALA LUMPUR

"Trend is still downwards. April number revision was not expected, but it entrenched the view of a slowing growth for India in the June quarter. Would this affect rates? I doubt it, but June numbers will be crucial for rate deliberation. For now we have not priced in any rate cut".

DARIUSZ KOWALCZYK, SENIOR ECONOMIST AND STRATEGIST, CREDIT AGRICOLE CIB, HONG KONG

"This is the second straight monthly improvement in the data series. While overall level remains subdued, the direction of changes is positive and gives some hope of growth rebounding in June quarter and beyond from the 9-year low hit in March quarter.

"This is modestly positive for the INR, although better growth may delay further rate cuts from the RBI. We expect the INR to edge higher on the data, and the INR OIS to move a bit up as well, especially at the short end, leading to bear-flattening of the curve."

RAHUL BAJORIA, REGIONAL ECONOMIST, BARCLAYS, SINGAPORE

"It looks like production momentum is stabilising but consolidating at a very low level which won't give the central bank a lot of comfort. Also with growth momentum not panning out well, rural consumption will get affected, and at that point it will become difficult for RBI to justify rationality for not cutting rates.

"There is a downward risk to our growth projection of 6.7 percent, which was revised in June from 7 percent, if monsoons are not good. We expect RBI to cut rates by another 100 basis points from now until March as growth is weak and core inflation below 5 percent, even though headline inflation will remain sticky."

SANJAY MATHUR, HEAD OF RESEARCH AND STRATEGY, ROYAL BANK OF SCOTLAND, SINGAPORE

"Today's number is better than last month's but it does not signal that we are in the middle of an upturn. Unambiguously, it is a weak number for a domestic demand-driven economy like India. With the Reserve Bank of India looking at fighting inflation, it is likely to hold its rates steady in the July review."

A PRASANNA, ECONOMIST, ICICI SECURITIES PRIMARY DEALERSHIP LTD, MUMBAI

"More than the May number, the revision in April number is a bigger problem. It seems growth is weak, but we can be cautiously optimistic. Overall I think the Q1 (April-June) GDP number will be comparable to Q4 (Jan-March), which means that slowing trend is still there, though on isolation the May IIP number may look better.

"We hold on to our view that after this number RBI will keep rates unchanged and will wait for headline inflation to come down before cutting rates. I think the April number is an aberration as I don't think there is a contraction in the economy."

ANUBHUTI SAHAY, ECONOMIST, STANDARD CHARTERED BANK, MUMBAI

"We will have to wait for some more time for a rate cut from the Reserve Bank of India. The first rate cut could only be in the first quarter of 2013, because inflation is likely to remain high for the rest of 2012. Inflation above 7 percent is very uncomfortable for the RBI. Monday's inflation print will be closely watched.

"But we will need to keep a close eye on the reforms being initiated by the government."

ABHEEK BARUA, CHIEF ECONOMIST, HDFC BANK, NEW DELHI

"Industrial growth is still very sluggish and the April revision suggests that there is a prospect of downward revision in May number as well. The first half (April-September) looks pretty grim at 2-3 percent IIP growth at best and second half may see some better IIP number on base effect.

"Even sequentially, industrial output is below trend for last four months. But with RBI saying that inflation is high despite economy operating at below potential growth and given what they articulated in the last policy, it is unlikely that RBI will be influenced by a lower IIP number. I think RBI will keep rates on hold until July, if not until September as headline inflation will be on an uptrend until then."

RUPA REGE NITSURE, CHIEF ECONOMIST, BANK OF BARODA, MUMBAI

"Growth figure for IIP at 2.4 percent is still dismal and strongly reflects the weaknesses in investment cycle. Unfortunately inflation is too high to expect the RBI to reduce the policy rates. Investors are keenly awaiting investment boosting measures from the North Block."

SHAKTI SATAPATHY, FIXED INCOME STRATEGIST, AK CAPITAL, MUMBAI

"The growth in intermediate goods, both year-on-year and on a sequential basis might have led to a softer recovery in the production activities. However, the monsoon sluggishness is expected to keep the growth activities subdued until August.

"What is quite worrying is the April revised data reiterated the slowdown impact on the economy and calls for a fast track action from the central government to cheer up the investment flows. The 10-year new G-Sec saw a 1 basis point down move post data announcement in anticipation of a rate cut from the RBI given the downward revision in the previous month's output data. However, the WPI data would be the key determinant to take a comprehensive decision while framing the July 31 policy."

SANDIP SABHARWAL, CEO, PORTFOLIO MANAGEMENT SERVICES, PRABHUDAS LILLADHER, MUMBAI

"This is extremely subdued growth and can at best translate into a GDP growth of 6 percent given the slowdown in agriculture as well.

"Food inflation is still at elevated levels and there is little expectations that it will come out because of monsoon. It is more of a structural issue."

Reuters

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