The index of industrial production (IIP) for the month of August came in last week as a major disappointment as it was below expected figures. July IIP was cut down to 0.4 percent (by the Central Statistics Office) from a provisional forecast of 0.5 percent and August also did not fare better at 0.4 percent as well. The markets remained jittery with the announcement of the IIP figures. The assessment of the August IIP came as a huge disappointment to economists who were expecting a considerably more cheerful figure. The IIP is indicative of a shrink in the nation’s manufacturing output despite a number of schemes and campaigns undertaking by the government to boost manufacturing in the country (such as the Make In India campaign).
Manufacturing constitutes about 75 percent of the national IIP. A strong sales trend in the automobile sector and what looked like a revival in other core sectors had allowed for an anticipation of a much better IIP figure.The cumulative growth of IIP between April and August this fiscal year over the same period last year was estimated at about 2.8 percent. A strong first quarter of economic expansion has failed to culminate in a boost in consumer goods production in both July and August.
CPI – reason to cheer
The estimation of India’s September CPI (consumer price index) for inflation which was declared on October 13, 2014, however, brings much relief to the worried economists and to the people alike. The September CPI, pegged at 6.46 percent is at an all-time low. Indian economists started to determine the nation’s CPI since January 2012 and this has been the lowest since Lower food and fuel costs are the prime causes for a low CPI. The expected CPI level for September was at 7.2 percent. The current estimation has certainly provided cause for cheer in the nation. August 2014 CPI inflation rate has been revised to 7.73 percent from the previously computed provisional 7.8 percent.
In the urban regions of India, the consumer inflation for the month of September was estimated at 6.34 percent and in rural regions this figure stood at 6.68 percent. Last month, the consumer inflation of the urban and rural was 7.04 percent and 8.27 percent respectively. According to experts the CPI is likely to further go down in the next couple of months.
One of the major reasons for the scale down of the CPI is the steady fall of crude prices. Brent crude prices dropped to about a 4-year low last week and costs reached about USD 89.46 a barrel for November settlement. This is bound to have impacted retail costs as India imports about 80 percent of its crude requirements.
Wholesale Price Index (WPI) based inflation figures for the month of September dipped down to a five-year low of 2.38 percent. This is the lowest it has been since October 2009, and considerably lower than 3.74 percent from August 2014. Tough WPI is no longer considered the main index for inflation computation, combined with CPI figures the WPI indicates a paradigm shift in the inflation battle. The WPI figure for July has been revised to 5.41 percent from 5.19 percent. In a statement to the nation, Indian Finance Minister Mr. Arun Jaitley said, “We are committed to continuing reforms in food markets, which will improve supply responses and keep inflation low and stable.” The announcement of the WPI-based inflation estimates sent most banking shares up by about 4 percent.
Food inflation has been one of the nation’s biggest battles of modern times. According to news reports, the overall food inflation computed on the basis of CPI fell from 9.35 percent in August to 7.67 percent in September. It is a sharp decline from 11.75 percent in September 2013. The vegetable price inflation registered a significantly lower ratio in comparison with August figures – it was pegged at 8.59 percent in September while August was 15.15 percent. Fruit price inflation, though not as low as the vegetable basket, was slightly lower than August – it went from 24.27 percent to 22.4 percent. While the prices of protein such as eggs, fish, and meat did rise, they did not rise as much as they did in August. Falling prices of fruits and vegetables just ahead of the Diwali season should give the common man ample reason to cheer.
Will RBI initiate a rate cut?
Given the current CPI estimates, the one question that has been resounding from all quarters is ‘Will RBI initiate a rate cut?’ The Indian central bank will be in no hurry to cut down rates or drastically modify its credit policy, if experts are to be believed. The Reserve Bank is likely to be patient and it is too early to initiate rate cuts anytime soon. Earlier this month, RBI Governor, Mr. Raghuram Rajan announced that the central bank would keep the repo rate (currently 8 percent), reverse repo rate (7 percent), the cash reserve ratio (4 percent), and teh standard liquidity ratio (22 percent) unchanged. The RBI is likely to review the rates again at the end of the quarter or earlier if deeded urgent.
The RBI has announced its intentions to steadily work towards curbing the consumer price index (CPI) inflation; its intended targets are about 8 percent by January 2015 and 6 percent in the longer run. While the January target now seems quite within reach, the country might yet need an effort to reach the 6 percent target. According to the RBI, the inflation vs. growth rate dilemma can only be solved by the government’s efforts to increase investments, particularly foreign investments into the economy.