Sluggish industry, low inflation may trigger rate cut

A couple of key macroeconomic indicators, inflation and factory output, presented a perplexing narrative on Monday, though it brightens the chances of a rate cut by the Reserve Bank of India. While inflation based on the consumer price index (CPI) registered a decline in August, the index of industrial production (IIP) shrank 2.4 per cent in July.

According to the data released by the government, the CPI decreased 5.05 per cent in August, coming down from 6.07 per cent in July. Low inflation, accompanied with slugging industrial growth, makes the slashing of interest rates by the central bank a distinct possibility. New RBI Governor Urjit Patel will carry out his first monetary policy review on October 4.

The food category cooled, from 8 per cent in July to 5.8 per cent in August. The fuel and light segment also declined to 2.5 per cent in August from 2.75 per cent in July.

Data on the industrial front, however, are not very comforting. The IIP is in the red, not just for July (-2.4 per cent) but also the April-July period (-0.2 per cent). This replicates the decline in manufacturing in the corresponding periods, -3.4 per cent and -0.14 per cent. Which is not surprising, given the three-fourths weight of manufacturing in the IIP.

The segments that contracted the most included rubber insulated cable, apparels, rice, HR sheets, and aluminium conductor. The high positive contributors were high speed diesel, antibiotics & its preparations, air conditioner (room), pan masala, and telephone instruments including mobile phone & accessories

Capital goods declined almost 30 per cent.

The electricity sector expanded 1.6 per cent in July, against 8.3 per cent in June, while mining registered a growth of 0.8 per cent, down from 5.3 per cent.