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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