RBI hikes CRR to curtail inflation
Dr. YV Reddy, the Governor of the Reserve Bank of India (RBI) never fails to surprise the markets. In yet another instance of his penchant for catching the markets off guard, he has hiked the Cash Reserve Ratio (CRR) by 50 basis points, to 5.50%. The increase is to be implemented in two phases, first on Dec. 26 and the second one on Jan. 6. The CRR is a proportion of deposits that banks must keep with the central bank as cash. The higher the CRR, less is the money available with the banks for the purpose of lending. The CRR hike is expected to suck out Rs130-140bn from the banking system. It will increase the cost of funding for banks and eventually result in increase in interest rates across the board. A slew of banks announced a revision in their interest rates. While SBI raised only the deposit rates, ICICI Bank went ahead with an increase in both the lending rates and the deposit rates. The PSU banks are reluctant to raise lending rates on their own without getting a green signal from the Finance Minister. However, if more private banks joint the rate hike bandwagon nationalised banks won't have much of a choice. The liquidity will also get squeezed in the coming days owing to advance tax payments, fresh bond auctions and the CRR hike. The move is unlikely to have a major impact on the banks' profits. But, doing business won't be easy going ahead in an environment of rising interest rates and growing credit demand. What remains to be seen is whether the RBI goes for another tightening in January. Right now, most bets are on another hawkish policy from Governor Reddy.
October industrial output falls sharply
The unprecedented expansion in industrial growth over the last few months came to an abrupt and a rather unexpected halt in October. What's worse is that the driver of the strong growth in the first half i.e. manufacturing is the main culprit this time round. The Index of Industrial Production (IIP) grew by only 6.2% in October 2006 as against 9.8% in the same month last year. Manufacturing, with more than 75% weightage in the IIP, saw its growth decline sharply, from 10.9% last year to just 6% this year. At the same time, mining and electricity actually did better than last year, growing by 4% (-0.1%) and 9.7% (7.7%), respectively.
If one digs deep into the numbers, one finds that capital goods growth decelerated sharply, from 24.3% to 8.2%. Within the Consumer Goods space, both Consumer Durables and Non-Durables registered weaker growth of 2.4% (16.4%) and -0.4% (14%), respectively. Another thing to note is that among the 17 industries, Food Products (90.83% weight) clocked a negative growth of 9.7%. Basic Chemicals & Chemical Products (140% weight) saw its growth fell from 9.3% to 1.9%. Machinery & Equipment (6.4%) and Transport Equipment & Parts (5.4%) were the other two industries where growth was sharply down from October last year.
One reason for the steep slowdown in industrial activity could be that companies chose to dip into their inventories built up over the previous months. another factor could be that the Diwali festivities fell in October instead of November. So, the number of working hours were lower than usual. Also, the base last year was higher, especially for manufacturing at 10.9%. Lastly, key components with high weightage failed to turn up the heat. So, there is no need to lose sleep over what appears to be a blip or an aberration in an overall buoyant environment for industrial growth. One will have to wait for the data for November and December, before jumping to any conclusion.