Fed Lifeline and IIP Slump

India's industrial output growth slipped sharply in January as high interest rates sapped consumer spending in Asia's fourth-biggest economy even as a US-led global economic slowdown loomed, data released by the Government showed. What's worse, the investment scenario in the country could be headed for some slowdown as companies struggle to raise money amid a global credit crunch and investor apathy in local primary market. The capital goods sector showed a steep decline in January over the same month last year. Consumer spending continued to struggle with the consumer durables segment exhibiting a negative growth rate for the month.

Production at factories, mines and utilities rose by 5.3% in January as against 11.6% in the same month last year, data released by the Government showed. The reading was lower than average expectations of 7-8% expansion. December's industrial production growth was revised to 7.7% from the provisional estimate of 7.6%. The manufacturing sector grew by 5.9% in January as against 12.3% in the same month a year earlier, while growth in mining and electricity too decelerated to 1.8% and 3.3%, respectively from 7.7% and 8.3% in the year-ago month. Year-to-date, industrial output grew 8.7% versus 11.2% in the same month last year.

The Capital Goods sector witnessed a steep slowdown in January, with its expansion falling from 16.3% last year to just 2.1% this year. Sectoral growth rate in Basic Goods and Intermediate Goods stood at 3.5% and 7%, respectively versus 12% and 13.7% in January 2007. Consumer Durables segment shrank by 3.1% compared to a growth of 5.3% in the same month last year. Consumer Non-durables recorded a growth of 10.1% as against 9.1% in January 2007. The overall growth in Consumer Goods was 7% in January versus 8.2% in the year-ago period. It remains to be seen whether the RBI now acknowledges the slowdown and cuts rates in April.

After last week's big losses, global equity markets received some relief this week in the form of another face-saving move by the Federal Reserve, which is desperately trying to avoid a recession in the US. The Fed and other central banks unleashed a plan to halt the ongoing meltdown across global equity markets in the wake of the correction in the US housing sector and the ensuing stress in the credit markets. The Fed said it will lend up to US$200bn of Treasury securities to primary dealers in the bond market secured for a term of 28 days, rather than overnight, as in the existing program. The new term securities lending facility (TSLF) will accept as pledge mortgage-backed securities, including federal agency debt, Fannie Mae and Freddie Mac residential-mortgage-backed securities, and AAA-rated private-label residential mortgage-backed securities. The move bolstered the mood across global markets, with the Dow Jones Industrial Average leading from the front.

However, sentiment soon turned sour after the dollar slipped below 100 yen and a mortgage bond fund of private equity firm the Carlyle Group said it had failed to seal a refinancing deal with lenders and expects lenders to take over nearly all its remaining assets. The fund said it has defaulted on US$16.6bn of its debt and its remaining borrowing is expected to go into default soon as it is unable to meet margin calls on its portfolio of residential-mortgage-backed securities. Just when it seemed that global stock markets could face another Black Day, came the announcement from ratings agency S&P that the writedowns by top global banks and financial firms could end soon. The markets rebounded on the S&P's encouraging prediction and continued the recovery after data showed that consumer prices held steady in the US last month. The CPI data fueled speculation that the Fed could aggressively cut rates when it meets on March 18.