As industrial output slows, experts expect rate cut

India's industrial output rose a much slower-than expected 4.1 percent in February from a year earlier, government data showed on Thursday. Manufacturing output, which constitutes about 76 percent of industrial production, rose an annual 4% from a year earlier, the statistics office said. (Read: February industrial output sluggish at 4.1%)

COMMENTARY

ARUN SINGH, SENIOR ECONOMIST, DUN & BRADSTREET, MUMBAI

"The IIP data is expected to be subdued till June at least and with inflation risks lurking around in the form of second round impact of the hike in excise and service tax rates announced in the budget, we cannot expect the RBI to cut rates at this juncture.

"We should expect rate cuts from RBI to begin from June only."

ABHEEK BARUA, CHIEF ECONOMIST, HDFC BANK, NEW DELHI

"A 4.1 percent number isn't really a compelling case for a rate cut, although I think given the opportunity of low inflation continuing, the RBI will cut the repo rate and CRR (cash reserve ratio) by 25 basis points each.

But currently, we need a CRR cut more than a repo rate cut to address the long-term liquidity issue. There was a clear case for downward revision in the January number as there was 42 per cent growth in consumer durables. But the February IIP number looks more credible as these numbers don't look bizarrely skewed."

MANISH WADHAWAN, MANAGING DIRECTOR AND HEAD OF INTEREST RATES, HSBC INDIA, MUMBAI

"We still stick to our initial projection of 25 basis point rate cut in April as I don't think there is a scope for massive rate cuts just by looking at one number.

"The inflation number will also be key as the RBI has often said IIP is a volatile series. But this is definitely a matter of concern that the April-February IIP number is only 3.5 per cent. However, bond yields are not expected to fall much even if there is a 25 basis point rate cut as huge borrowing will be a bigger concern."

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

"The data confirms that the IIP growth is in trend with the yearly growth of 4 per cent. But the data is not good at all as even after growth bottomed out in third quarter (October-December), the recovery is not really picking up on the demand side.

"Such higher interest rates in the economy will affect demand-side improvement. From RBI's policy perspective, we still think that there is scope for just 25 basis point rate cut in April as given that inflation is moderating only on the margin, and growth in 2012/13 is expected to be according to RBI's trend line of 7 per cent, there is not much scope for bigger rate cuts."

H.M.BHARUKA, MANAGING DIRECTOR, KANSAI NEROLAC, MUMBAI

"Manufacturing growth will continue to slow even in the coming months because confidence is very low and any kind of improvement there will only happen when interest rates come down.

"Corporate spending has hit a snag and will continue that way with people pushing back their capex plans. Consumer goods spending is better but growth in the main sectors, which are infrastructure, power, auto, banking, have all been hit and a revival there is not expected immediately."

AMBAREESH BALIGA, CHIEF OPERATING OFFICER, WAY2WEALTH SECURITIES, MUMBAI

"The data is much lower than expected. This seems to strengthen the case for a rate cut next week, and the markets seem to have rebounded on that expectation.

"The problem is that a 25 basis point cut has already been factored in, in which case there may be a small bump up in the indices, and nothing more."

VIVEK RAJPAL, INDIA RATE STRATEGIST, NOMURA, MUMBAI

"The lower February IIP number as well as the huge revision to January data highlights the growth concerns, and cements view of a 25 basis point rate cut from RBI next week.

"We now need to see how the March inflation data comes in because if that too surprises on the downside, then we could see a 25 bps cut along with dovish language in the statement."

SUJAN HAJRA, CHIEF ECONOMIST, ANAND RATHI SECURITIES, MUMBAI

"We were expecting a better number, above 6 percent. Overall, this is disappointing, but our sense is that irrespective of IIP, the RBI will go ahead with a 25 basis point rate cut at the upcoming policy decision."

MARKET REACTION

- The 10-year benchmark bond yield was at 8.48 percent, down 4 basis points from its level before the data was announced.

- The one-year rate overnight indexed swap rate also eased 2 bps to 7.97 per cent, according to traders.

- The Sensex pared gains immediately after the data, while the rupee was largely unchanged at 51.42 to the dollar.

BACKGROUND

- India's economy probably expanded 6.9 percent in the 2011/12 fiscal year that ended on March 31, its slowest pace in three years.

- The government expects a better showing in 2012/13 and has pegged growth at 7.6 percent for the new fiscal year.

- Manufacturing sector expansion slowed for a third month in March as growth in new orders eased and costs for raw materials kept rising, a business survey showed.

- Growth in the Indian services sector slipped to a five-month low in March as optimism about the business outlook in the coming year faded to its weakest level since 2009, a survey showed last week.

- India's headline inflation edged up to 6.95 percent in February on higher food costs.

- The Reserve Bank of India (RBI) is widely expected to cut the repo rate - the main policy rate - by 25 basis points to 8.25 percent to spur growth when it reviews policy next Tuesday.

- The RBI has already cut banks' reserve requirement by 125 basis points in two moves since late January, making more money available for lending.