Between monsoon, IIP and inflation, RBI's rate cut options get really narrow

Even after Raghuram Rajan, Governor, Reserve Bank of India (RBI) said that the last rate cut was 'front loading' the economy, some industry experts thought that there still was room for another rate cut this year. Is there any?

A quick look at the Index for Industrial Production (IIP), June retail inflation and July's monsoon trend will tell you that there is no chance the RBI is going to please the markets with another rate cut.

Monsoon

The Indian Meteorological Department (IMD) and Skymet -- a private sector weather forecaster -- are at loggerheads over the monsoon prediction for the month of July; the rains, or the lack of them, so far has been worrying.

On July 9, the IMD said that rainfall for the first week of July was below normal by 51%. South Peninsula suffered the most, with an 81% drop, Central India followed with a 76% cut, and North-West India saw a 28% fall in rainfall in the said week.

Given the good rains in the month of June, IMD had said, "For the country as a whole, cumulative rainfall during this year’s monsoon has so far, upto July 8, been 4% below the Long Period Average (LPA). Rainfall activity was near normal in all the broad homogeneous regions of India."

Rainfall in 41% of India, or 247 districts is still deficient or scanty. 

Siddhartha Sanyal and Rahul Bajoria of Barclays, in a report dated July 10, 2015, said, "A silver lining is that despite below-normal rains, the geographic distribution of rainfall remains favourable, with 26 out of 36 regions still showing excess or normal rainfall conditions. Also, the water stock has improved in 91 major reservoirs, with levels as of July 2, 129% of levels seen last year."

Skymet's CEO said, "I would also like to mention that 2015 could now only be a drought if both July and August end up with an average deficiency for the two months, of 20% or more. This is highly unlikely. If July, August and September are down by 8,10, and 20% respectively, even then the season as whole will not be a drought.

I must mention that we are sticking to our April forecast of 102% of the LPA, without changes or qualifications. At Skymet, we think 2015 is going to be a normal Monsoon."

Inflation

The good news is that sowing activity continues to pick up. The Barclays duo said, "Sowing activity continues to pick up and was up 57%, relative to 2014 as of July 3, with strong increases seen in pulses (132%) and oilseeds (403%). The government has also made inflation management a top priority by placing import orders for wheat, pulses and oilseeds."

However, the inflation continues to scale up, narrowing any window of hope that was present for a rate cut on August 4.

IFA Global, in a report dated July 14, 2015, said, "Going forward, the India CPI inflation might increase gradually owing to unfavourable base effect and weak monsoon conditions. The probability of interest cut in August monetary policy meet will remain muted as the RBI has already front loaded the interest rate cut."

Deepak Shenoy, founder of Capital Mind, wrote in his blog, "So we don’t expect the RBI to cut rates. This inflation headline number (5.4%) is largely within RBI parameters (it expected 4.4% to 6%), which therefore would not worry it too much. And the core inflation rise is only nascent and a source of future worry (post October).

At this point, we don’t expect any action from the Central Bank. Markets will probably have a bigger issue with (first quarter) results or worldwide issues, and brush away the numbers on inflation."

Dipankar Mehta of Motilal Oswal on July 10, said, "While RBI hasn’t cut rates in proportion to the decline in inflation, we expect the central bank to return to easing stance once clarity over monsoon-related uncertainties emerges."

IIP

This brings us to the third cog in the wheel -- IIP. Although, a slowing IIP means that India Inc will ask RBI for a rate cut, the latter is unlikely to oblige.

The IIP figure in May slowed to 2.7% against 5.6% in the same month last year.

This sluggish factory output is likely to continue. Dhananjay Sinha and Kruti Shah of Emkay, in a July 13 report said, "IIP is likely to remain subdued going forward and is likely to be dominated largely by basic goods performance. Initial indicators of June’15 IIP are mixed, wherein the consumer-oriented auto production witnessed a relatively strong growth while electricity generation and CV production point towards a relatively subdued growth. However, with visible slowdown in electronic goods imports, consumption activity is likely to remain subdued."

A statement by Jyotsna Suri, President, FICCI said: "Manufacturing sector growth seems to be picking up though it remains sluggish. With capital goods sector registering positive growth, it indicates (a) turnaround in investments in economy".

She focused on the government's role in reviving the economy by saying, "Negative consumer demand growth is an area of concern and we hope that government would bring out specific measures to stimulate demand in the economy."

Indranil Sen Gupta and Abhishek Gupta of Bank of America Merrill Lynch, however, continue to expect RBI to cut rates by 25 basis points if rains are normal. They said, "We continue to believe that lending rate cuts, rather than reforms, hold the key to an immediate cyclical recovery by say, end-2015. Reforms will support growth only over, say, five years and so; it does not really matter where monsoon parliamentary session – unlikely – or next."