Moderation in the third quarter GDP growth has left economists to wonder what policy action the Reserve Bank would resort to during its monetary policy review later this month.
A Citi India Macro Report said that the moderation in growth due to a collapse in investments is largely priced in.
Trends have bottomed out. But recent steps on the infra front are encouraging and could result in investments picking up in the latter half of the year.
“While we maintain our view the repo rate being eased 100 bps in 2012, the recent rally in commodities needs to be carefully monitored and could influence rate decisions,” the report said.
Mr Indranil Pan, Chief Economist, Kotaka Mahindra Bank, too agreed that the GDP release was on expected lines. As anticipated, mining is negative and manufacturing is very low.
These were in any case getting factored in from the monthly IIP trend. Looking at the services sector, it is also slowing.
The RBI is expected to factor in these growth dips and start cutting rates from April, first cut of 25 bps.
But the RBI might not be able to cut the policy rates aggressively as inflation concerns persist, especially with international crude oil prices remaining firm.
According to Dr Arun Singh, Senior Economist, Dun & Bradstreet, the major concern lies in the slowdown of the manufacturing activity.
In this scenario, the continued decline in output in the mining sector seeks urgent action from the Government and private sector as the recovery in this segment is essential to drive the industrial activity in future.
The significant revision in the investment data points to a substantial decline in investment demand.
Nonetheless, the expected easing of the policy rates by April 2012, subsequent revival of the investment demand and the likely focus on reforms in the upcoming Budget would help economy to gather strength during the subsequent financial year.
Deutsche Bank Fixed Income Research Asia said GDP data should be analysed keeping in mind that the last quarter of 2011 was one of the most challenging times. The only positive trend in the expenditure side data was a strong recovery in private consumption segment.
While the weak GDP data along with the recent moderation in WPI inflation justifies some rate cutting action, rising oil prices hand have complicated RBI's monetary policy decision.
The central bank may remain cautious given clear and substantive upside risks to fuel inflation, which can push WPI inflation once again above the 7 per cent mark. “Consequently, we maintain our view that the RBI will refrain from cutting the repo rate in the upcoming monetary policy review on March 15.”
A 50-bps cut in the Cash Reserve Ratio looks very likely given the prevailing tight liquidity conditions in the money market, the report said.