Business, Economy, Government

Will the rate cut wed business expectation and reality?

The RBI Monetary Policy Committee’s (MPC) will be expecting the cut in borrowing rates to spark business sentiment, which was burning at low flame according to the 75th round of the Reserve Bank of India’s Industrial Outlook Survey (IOS) conducted during August-September 2016 period.

Availability of finance from banks and other sources was perceived to have improved along with reduced pessimism in the cost of finance, according to the results of the survey. The RBI in its monetary policy statement said that the new liquidity conditions should blaze a revival of credit to the productive sectors. In this sense, improved credit sources, working and employed resources should reduce pessimism even further.

If at all this rate cut should act as a lighter, then the business sentiments of the Indian manufacturing sector, which took a siesta in the previous quarter, as reported in the Business Expectation Index (BEI), will arise and hope to see a better capacity utilisation and an improvement financial situation.

The industrial sector, that experienced a manufacturing-driven contraction in Q2, and as measured by the index of industrial production (IIP) turned out to be slower than a year ago.

“In August, steel production rose to a 37-month high and cement production maintained momentum – auguring well for construction activity – even though the output of core industries as a whole was weighed down by a decline in the production of coal, crude oil and natural gas and deceleration in refinery products and electricity generation,” the policy statement said.

This is in line with the businesses that fear a pressure from rise in cost of raw materials. Hence, they kept profit margin unchanged, according to the Industrial Outlook Survey. Still, their expectations stayed expansionary for Q3.

RBI said that the strong public investment in roads, railways and inland waterways, the recent efforts to unclog cash flows in large projects under arbitration, and the boost to spending from the 7th Pay Commission’s award, should improve the industrial outlook. But, the pressures, even after the accommodative stance that the MPC professes with its +/-2 per cent inflationary band, will be hard to control if it creeps into the economy. The result, however, could be as expected with no signs of improvement in the global trade, investment and growth.

Several industries will soon take a hit if crude prices, which rose to a recent peak in Q2 of 2016, mostly on supply disruption in various parts of the world, rise again if the OPEC announce cutting back on supply.


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