Expect interest rate cuts, growth next year – Crisil Research

Crisil Research said it expected industrial growth to continue to recover “somewhat” over the next fiscal year with the help of a normal monsoon and lower inflation and interest rates.

The research wing of Crisil ratings agency said it continued to expect inflation to fall further and the Reserve Bank of India (RBI) to cut interest rates further. Interest rates have almost doubled in the last few years as the RBI attempted to rein in price rise by raising borrowing costs.

However, the double blow of high inflation and rising interest rates have throttled industrial growth in the country to their lowest levels in several years.

Crisil said a mild bounce-back in industrial production numbers in February is unlikely to affect the expected decline in inflation in the new year starting April.

Interestingly, the latest consumer price index also showed a rise in retail inflation in February to 10.91% compared to 10.79% for January 2013.

Crisil Research continues to expect both the inflation and interest rates to fall.

“RBI is expected to cut repo rate by 50-75 basis points by March-2014 in view of falling inflation,” it reiterated today.

Crisil did not seem to be basing its forecast too heavily on the expected boost in government investments and programs.

“Although the Union Budget 2013-14 by announcing some measures such as investment allowance of 15% on investment worth Rs 100 crore or more, zero customs duty on import of plant and machinery for semiconductor wafer fab manufacturing, setting up of 2 more industrial corridor etc has tried to revive industrial growth and investment in the country, much would depend upon how quickly the issues relating to mining rights, land acquisition, environmental clearances, etc are satisfactorily resolved,” it added.

Industrial output grew by 2.4 per cent in January 2013 on year-on-year basis. However, during this fiscal so far it has contracted in six out of ten months, Crisil Research pointed out.

“As a consequence the cumulative industrial output growth for the April-Jan period is a paltry 0.9 per cent.”

Manufacturing sector grew at 2.7 per cent in January 2013 after contracting for the previous two months.

Weak consumption and investment demand on the domestic front and sluggish exports on the external front has hit the manufacturing sector hard. Output of 11 out of 22 manufacturing industry groups at a 2-digit classification contracted in January 2013 .At use based level, output of consumer goods sector grew after a gap of two months, aided by a growth in output of consumer non-durables. The mining sector continues to be in trouble plagued by policy hurdles.

Output of the eight core infra industries having nearly 38 per cent weight in IIP, grew by 3.9 per cent in January 2013 as compared to 2.5 per cent a month ago. The infra industries that witnessed negative growth in January 2013 were crude oil, natural gas, fertilizers and cement.

Output gap (the difference between the actual growth and the estimated potential growth adjusted for seasonal and irregular effects) for the manufacturing sector is in the negative territory since April 2011 and stood at -6.8 per cent in January 2013, Crisil pointed out. “This shows that manufacturing sector has consistently been underperforming.”