WPI, IIP Data Gives RBI Mixed Signals

DSIJ Intelligence / 14 Dec 2012

With the government doing its bit by bringing in the much-awaited reforms, all eyes are now on the Reserve Bank of India (RBI), which could slash the key repo rates and endear itself to the markets.
With the government doing its bit by bringing in the much-awaited reforms, all eyes are now on the Reserve Bank of India (RBI), which could slash the key repo rates and endear itself to the markets. Typically, the RBI takes a decision on the rates by taking into consideration some key economic parameters like the Wholesale Price Index (WPI), Consumer Price Index (CPI), Index of Industrial Production (IIP) and the liquidity situation. Let's look at what some of these parameters are hinting at as of now.

The Wholesale Price Index (WPI) inflation data for the month of Nov 2012 came in on Dec 14. This figure was at 7.24%, which is lower than that of 7.45% for Oct 2012. Inflation coming in on the lower side was a surprise to the markets, as the general consensus was that it would come in at around 7.6%. Earlier, the Consumer Price Index (CPI) inflation number for Nov 2012 came in at 9.9%. The CPI showed an increasing trend, up from 9.75% for Oct, unlike WPI, which softened during the period in question.

In the past, we saw the Index of Industrial Production (IIP) data for Oct at 8.2% against a negative 0.4% growth in Sept 2012. This figure was significantly higher than the street’s expectation of 4.5%, and marked the fastest growth that the index saw in 2012.

On one hand, with WPI coming in at the lower end, there are hopes that we may see the apex bank slashing the interest rates. On the other hand, stronger IIP numbers are causing the rate cut hopes to fade.

So, what will the RBI's action on Tuesday, December 18, 2012 be? Will it maintain status quo once again or will it bring cheer to the market by slashing the rates?

In its Oct 2012 meet, the RBI had said that inflation may remain sticky and move higher till Dec 2012, after which it may start softening from the March quarter of 2013. We believe that even though the WPI number has came in on the lower side, one has to watch out for the consolidation of the same. Once inflation shows clear signs of softening, only then should the regulator should go ahead and slash the rates. One could probably see a CRR rate cut as the advance tax deadline (Dec 15, 2012) for corporates would create liquidity crisis into the system. A CRR cut would give relief to the banks in terms of liquidity.

We, at Dalal Street Investment Journal (DSIJ), hold that the bank will maintain the interest rates where they are this time round too. Media reports say that even the Prime Minister's economic advisor C Rangarajan does not expect the RBI to cut interest rates. In fact, we opine that the RBI should gauge the economy and then take an appropriate decision in the Q3 review of the monetary policy slated for Jan 29, 2013.

Of course, it is true that the governor does have a habit of surprising the markets. The RBI could join hands with the government to give the economy a Christmas gift on the interest rate front. A rate cut action by the RBI and government’s speeding up of the reforms process would certainly help revive the “animal spirit” in the economy.

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