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Breaking: Services & Manu PMI lowest since Sep18, “Job creation 6 month low”, RBI All Set to Reduce Policy Rates by 50bps

Breaking News:

  1. Services PMI at 52 is still expanding but lower than Feb (52.5)
  2. At 52, it is lowest expansion since March
  3. Nikkei notes that “Job creation at six-month low

That RBI is set to reduce repo by at-least 25 bps (if not 50) in its upcoming 4th April monetary policy review meeting is a foregone conclusion. Even the hawks in that room (Dr Viral Acharya , Dr Chetan Ghate- voted against drop in rates in Feb 2019) will have tough time to defend status quo. Why?

RBI, like many other central banks, does inflation targeting. Keeping a tight eye on inflation, RBI decides the way forward. The range is 2% – 6% and a comfortable target is 4%. As evident from our review of the minutes of last policy meeting, RBI folks evaluates primarily following parameters:

Inflation: Current & Expectation, Economic Growth prospects, Consumer confidence, Fiscal prudence. For the same it generally looks at quite a few data points but the most important are: All India annual monthly inflation data, latest GDP / GVA provisional data, RBI consumer confidence survey, Nikkei PMI Index for the country (Manufacturing & Services), IIP index data (Index of Industrial production).

Before jumping to the numbers, let us remember that RBI will look to reduce rate if it believes inflation is under control and is still low, a growth stimulus is required for the country and overall global economic scenario is still a little beaten.

Let us start with the most important parameter, INFLATION

As evident, overall inflation is still low at 2.6% but has increased after slight slow down in earlier month.

F&B inflation is still deflating but deflating slower. Non food inflation is still charting a downward slope.

Let us look at major components. Vegetable price index is still falling but at a much slower rate compared to earlier months. April-Aug is when it generally starts increasing and hence needs to be watched out for!

Hence from inflation perspective, figures are still very comfortable though the hawks would refer to slight rise in overall inflation and also F&B inflation gradually inching towards positive after being negative for last few months.

Next critical factor is Economic Growth

This is where the story does not look promising enough.

  1. Latest Manufacturing PMI (March) is at 52.6 which is at a 6 month low after hitting 54.6 in Feb. Nikkei states that “the latest figure highlighted a loss of growth momentum”
  2. GDP growth rate is running reverse to last year. Q3 growth at 6.6% only against 7% in Q2 and 7.7% in Q3 of last year.
  3. IIP (Index of Industrial Production) Sectoral growth dropped to 1.7% in Jan 2019 compared to 2.6% in Dec 2018. Except Mining, rest (Manufacturing and Electricity) growth have dropped significantly from Dec 2018.
  4. IIP Use-Based growth also slowed down in Jan-2019 both for consumer durables (1.8%) and consumer non durables (3.8%) which is not a great sign. Capital and Infra goods also de-grew in stark contrast to Dec-2018 as evident from the IIP graphs.
  5. McKinsey economic survey (released on March 31st, click here to access the same) also indicates that nearly 60% of respondents believes that Indian economic conditions have worsened or remained the same compared to 6 month before
  6. EPF (Employee Provident Fund) latest data also shows subscriber gross and net addition worsened in Jan-2019 compared to Dec-2018 (YoY comparison to the same month but year back i.e. Jan 19 growth vis-à-vis Jan-2018 & so on)

The following charts illustrates the above points in greater details:


With India coming up for a decisive election, the GoI will be very upset if the economic positivity is not reflected in terms of growth numbers. With inflation still low and at comfortable position, RBI will be under huge pressure to play ball. The Gov had changed the Governor, precisely for the same and he needs to deliver. There can be a little bit of dissent from Mr. Ghatge and Mr. Viral Acharya, but majority will still push for further drop in rates and 50 bps is not unlikely.


Nikkei for PMI data; GDP, IIP, Inflation, EPFO from respective Government sites. Featured image from https://freerangestock.com/

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