Index of Industrial Production plunges; interest rates may not fall

India’s industrial growth, as measured by the Index of Industrial Production (IIP), plunged to its lowest in two years to 3.3% in July compared with 9.9% in the same month last year, indicating consumer demand is taking a beating.

If the trend continues, there could be an impact on salary hikes and creation of new jobs, said E Balaji, managing director and CEO of MaFoi Randstad, the executive search firm.

For the economy, a double whammy could be at hand because the Reserve Bank of India (RBI) is expected to continue nudging interest rates higher at its September 16 monetary policy review.

YV Reddy, the former governor of RBI, recently said that controlling inflation — which remains stickily high in India — remains the apex bank’s ‘dharma’, no matter its negative impact on the demand for goods and therefore industrial growth.

Increasing interest rates and reducing the cash in circulation in an economy are among the tools used by central banks to control inflation.

The result of all this, said Abheek Barua, chief economist, HDFC Bank, is that there will be a further deceleration in the demand for manufactured goods.

However, a crash in industrial growth is not expected, said Indranil Pan, chief economist, Kotak Mahindra Bank.

Leif Lybecker Eskesen and Prithviraj Srinivas of HSBC concur. “We are seeing a moderation and not a collapse in growth,” they wrote in a note on Monday.

“This moderation is the natural result of the lagged effects of monetary tightening, the high level of inflation, tight capacity, and now stronger global economic headwinds,” Eskesen and Srinivas wrote.

Data show consumer goods grew at 6.2%, which is faster than 5.8% in last July, but there’s scepticism whether the trend will continue.

“We believe the pick-up in consumer goods output growth is unlikely to persist, as intermediate goods output continues to weaken. Other indicators, such as loan growth for consumer durables, also suggest that demand for durable goods is likely to weaken in the coming months,” said Tomo Kinoshita and Aman Mohunta of Nomura Securities in a note.

Will this mean the Reserve Bank of India pauses at its September 16 monetary policy review?

“Given the high degree of volatility in data there may be scope to argue that the central bank will not immediately interpret it as a cause to take dovish measures,” Taimur Baig and Kaushik Das of Deutsche Bank said in a note on Monday.