RBI urged to hold off rate hike as industry output slows

NEW DELHI - Leading industry chambers Friday urged India’s central bank not to raise interest rates again after data showed that India’s industrial output in December 2010 grew at its slowest pace in almost two years, rising by a modest 1.6 percent.

The Index of Industrial Production (IIP), the barometer of the output of various sectors like manufacturing, stood at 8.6 percent for the April-December period of the current fiscal, according to data released by the Planning Commission Friday.

Industrial output grew by 18.6 percent in December 2009.

“The large base effect may have been one of the causes for sharp slowdown of the manufacturing sector in December, besides tight monetary policy and partial exit from the stimulus,” said Rajan Bharti Mittal, president of the Federation of Indian Chambers of Commerce and Industry (FICCI).

Industrial output in November 2010, earlier registered at 2.7 percent, was revised upwards to 3.62 percent, the data showed.

Manufacturing output, which constitutes a majority of the IIP, rose by one percent in December, while mining and electricity sectors grew by 3.8 percent and six percent, respectively.

“The growth of the manufacturing sector is moderating as is evident from the fact that machinery and equipment segment has witnessed a negative growth of 12.8 percent in December. In the light of this sharp decline, we add a cautionary note on further tightening of monetary policy and exit from the stimulus, said Mittal.

During the month, capital goods and consumer non-durable goods showed the most negative growth. Important items registering high negative growth included computer system and peripherals (-52.2 percent), and agricultural implements (-49.6 percent).

Twelve of the 17 industry groups have shown positive growth during the month of December.

Commenting on the latest data, Finance Minister Pranab Mukherjeee said the data was “disappointing but on expected lines”. He, however, said that monthly numbers did not reflect the actual scenario.

“Monthly and weekly numbers do not reflect correct picture. Therefore, you shall have to take the whole year into account. Let us see how it reflects in the annual picture,” the finance minister told reporters here.

The Reserve Bank of India had last month hiked key interest rates to combat high inflation and hinted at further tightening in the future. This could, however, have a dampening effect on industry as credit would get costlier.

“We dont think the RBI will react too much on the December IIP numbers. Interest rates remain high and going forward, inflation will continue to remain the main cause of worry,” said Anis Chakravarty, director, Deloitte, Haskin & Sells.

Planning Commission Deputy Chairman Montek Singh Ahluwalia said that not much should be read into the latest IIP figures.

“Month-to-month variation in the IIP should not occupy us too much. Also, when it shoots up next month, don’t assume that it’s now going to continue at a very high rate,” said Ahluwalia.