Flat IIP growth in April makes case for rate cut: Experts

India's industrial output was almost flat at 0.1 per cent in April compared to a year ago and was well below expectations, government data showed on Tuesday.

Analysts had expected output to grow 1.7 per cent. The April figure compares with an annual contraction of 3.5 per cent a month earlier.

ABHEEK BARUA, CHIEF ECONOMIST, HDFC BANK

"The data clearly points to industrial growth being extremely weak, and it is in clear need of monetary as well as fiscal support. I think industrial growth needs monetary stimulus irrespective of what the headline inflation number shows day after tomorrow.

"There is a case for a sharp move from the Reserve Bank of India, and I would not be surprised if RBI goes for a 50 basis points repo rate cut or a combination of 25 basis points cut in both repo rate and the cash reserve ratio.

"The industrial growth is looking very weak irrespective of legitimate skepticism on the veracity of IIP data. We are seeing sustained slower growth in industry, which is becoming broad-based.

"A lot of what Standard & Poor's said was valid, but the timing was misguided and misplaced. The rating agency could have avoided this in the middle of turmoil that India and other economies are going through; it just added to the negative sentiment. Some degree of caution from the rating agencies is called for."

DEVEN CHOKSEY, MANAGING DIRECTOR, K.R. CHOKSEY SECURITIES

"Tightening of rates earlier have impacted GDP and IIP numbers. Inflation may not come down, but rate cut is a must now because we are really lagging action.

"I wouldn't be surprised if RBI cuts rates and CRR (cash reserve ratio) by 50 basis points each at the policy next week."

A PRASANNA, ECONOMIST, ICICI SECURITIES PRIMARY DEALERSHIP

"I think this data will call for a policy response from the RBI as this eventually also has an impact on GDP. Given core inflation is well behaved, I now expect RBI to cut rates by 25 basis points in June. Looking at the rupee, equity markets, things are pretty bad irrespective of any downgrade by S&P. Downgrade is just a cosmetic change.

"But I think this data is distorted. The GDP and IIP data shows exaggerated slowdown. If this kind of data continues, it will have an impact on sentiment and will be self-fulfilling.

MARKET REACTION

Markets barely reacted to the industrial output data, given widespread expectations for a weak expansion. The rupee was in range at 56 to the dollar, little changed from before the data. The benchmark 10-year bond yield was also flat at 8.31 per cent from beforehand. Stocks pared mild losses to trade flat, with Sensex unchanged on the day.

BACKGROUND

- Standard & Poor's said on Monday that India could become the first of the so-called BRIC economies to lose its investment-grade status, less than two months after cutting its rating outlook for the country.

- The Reserve Bank of India is widely expected to lower its main lending rate by 25 basis points (bps) to 7.75 per cent on June 18 when it reviews its policy for the first time after cutting rates by a sharper-than-expected 50 bps in April.

- Falling global oil prices as well as declining core inflation and growth in India give the central bank room to adjust interest rates, a deputy governor said last week.

- India's economy expanded 5.3 per cent in the March quarter, its slowest pace in nine years, on a combination of mounting global uncertainties, muddled policies, high inflation and steep interest rates at home.

- Manufacturing sector kept up its steady expansion in May, driven by rising output, a business survey showed.

- Car sales rose just 2.8 per cent in May from a year earlier as a hike in excise duty on the vehicles hit demand.

- Headline inflation accelerated in April to 7.23 per cent as price pressures for food, fuel and manufactured items all picked up.

- Consumer price inflation in April stood at 10.36 per cent, compared with 9.47 per cent in March.