Falling Rupee and Sticky Inflation Negate Scope of Monetary Easing Challenging Environment for Monetary Authorities: India Ratings
India Ratings & Research believes that the continuous slowdown in industrial production, falling rupee and stubborn inflation will pose challenges to the conduct of monetary policy. While depreciating rupee and sticky inflation call for a tighter monetary policy, falling industrial growth demands for an accommodative monetary policy. Thus, despite industrial slowdown, the scope of monetary easing is limited.
Weakness in Industrial Activity to Continue: Sustained weakness in both consumption and investment demand has adversely impacted India’s industrial output for over two years now. Besides policy logjam, weak consumer/investor sentiment and stubborn inflation, the new pressure point that has emerged lately on the India’s macroeconomic front is weakness/ volatility in the rupee against the dollar. This does not augur well for the economy in general and industrial output in particular.
Rainfall, Exports and Investment are Key: Rainfall, at 15% above normal up to 7 August 2013 is likely to boost rural spending on the manufactured items that are largely consumed in rural areas. Indian exports, which in July 2013 exceeded USD25bn (11.6% growth), depend upon global demand. Continuous exports growth would revive industrial growth. However, growth of industrial output may remain muted till investment and exports demand picks up.
Broad-based Slowdown: The index of industrial production in June 2013 declined 2.2% yoy mainly due to the continued dismal performance of the manufacturing and mining sector. The manufacturing sector with 75% weight in index of industrial production (IIP) declined 2.2% yoy. Sustained weakness in both domestic and global demand has hit this sector very hard. Moreover, The Reserve Bank of India’s (RBI) tighter monetary policy stance amid persistent and high inflation has only added to the woes.
(Source: Manager – Corporate Communications and Investor Relations, India Ratings & Research- A Fitch Group Company.)