Monday, 14 March 2016

IIP slump signals renewed economic recovery doubts

January’s 1.5 per cent plunge in industrial output, marking the third successive contraction, is reflective of a sluggish recovery in Asia’s third biggest economy, and presses the case for the Reserve Bank of India (RBI) to deliver another dosage of monetary stimulus in the form of an interest rate cut to help buoy demand and revive flagging investments.

Signaling fresh signs of distress in manufacturing, which makes up over two-third of the IIP, output in the sector shrank 2.8 per cent, year on year in January 2016. A 20.4 per cent contraction in capital goods output is indicative of weak business sentiment amid a global slowdown, a rising corporate debt burden and tepid credit growth as banks battle mounting bad loans.

Further, stagnation of consumer goods output in January is a big blow for the consumption driven Indian economy. With the ongoing global gloom unlikely to lift soon, there is an urgent need to lift domestic consumption, and a 25 bps rate cut by the RBI at its upcoming policy meet on April 5 would come in handy.

With wholesale inflation remaining in the negative territory and the government sticking to its vow of maintaining fiscal prudence in the Union Budget 2016-17 without compromising on development spending, the central bank has been provided with some leeway to ease policy and help power an economic acceleration.

A rate cut could support Dalal Street which has witnessed a handsome post- Budget rally with foreign funds returning after a two-month exodus as solid progress on the fiscal front and macroeconomic stability consolidated India’s position as a haven of stability amidst an uncertain global scenario.

Unprecedented easing measures from the European Central Bank (ECB) and further stimulus expected from the Bank of Japan (BOJ) this week and the diminishing likelihood of a Fed rate hike in the near-term, coupled with a recovery in oil prices could increase the lure for high yielding assets, supporting Indian equities.

Latin Manharlal Group

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