Will RBI relent and finally lower rates?

If there were any hopes that the Indian economy was recovering, those were quelled by the disappointing factory output data released for November 2012. Indeed, the index of industrial production (IIP) fell by 0.1% during the month. In this, the mining sector declined by 5.5%. On the other hand, the manufacturing and electricity sectors grew by 0.3% and 2.4% respectively. In terms of industries, 13 of the 22 displayed negative growth during the month. As a result, the pressure has obviously mounted on the RBI to cut rates.

But we doubt that this will be enough for the central bank to relent. Indeed, the Indian economy has slowed down during the last couple of quarters. But the central bank is clear that inflation needs to come down. And so it has maintained a status quo on rates despite the slowdown. Now if the government pulls up its socks and takes effective measures to cut down its fiscal deficit, it will be much more meaningful in our view. And will certainly ease the pressure on the central bank.