Updated on 25th November 2014


    • Pressure rises on RBI to cut rates next month
    • Rajan to take independent decision – may surprise all
    • Consumer markets stagnate, revival is nowhere in sight
    • Dramatic fall in crude oil price brings inflation down
    • Cooling global commodity prices give more relief
    • Next year growth at 6.5% + if reform bills cleared in Parliament winter session


The sizzle expected from the festival sentiment turned out to be a damp squib. The first six months of this year saw an uptick in consumer markets and interestingly, this time Diwali saw better than expected sales for FMCG goods in urban areas. Clearly consumer sentiment has improved dramatically, and yet there are many blips. For the last quarter, India Inc reported the lowest net annual sales growth in five quarters, and even now companies are not looking at firm growth ahead. Though there was much hope for the festival season, car sales in particular dropped almost 3% in October compared to last year; SIAM’s expectations for a 5-10% growth this year are unlikely to materialize now.

For growth, the picture is not looking particularly bright. This message is also coming through from global investors. There are of course high expectations for India, and this shows up in the country receiving the second highest foreign portfolio inflows in Asia this year. Yet FDI interest has been flagging recently, and will take its cues from structural reforms if and when they happen. The IIP Capex data is notoriously volatile, even then it clearly shows that the capex sector has still not turned the corner. Consumer durables output is another key sector that has not shown positive growth in eighteen months now.The Markit PMI also showed a softening in the services sector business activity last month. There are many positive moves in the pipeline- GST bill, Insurance Laws Amendment Bill, Coal Mines (Special Provisions) Bill, 2014 etc. - and the upcoming Parliament session will be extremely crucial for a turnaround in the economy.

On the plus side, inflation has softened considerably, thanks to the dramatic fall in the crude oil prices. Even though unseasonal rains have again damaged rabi sowing in some areas, overall, the season can be expected to be a good one. It is not certain that this will be sufficient for the RBI to cut rates next month. The question is whether the RBI will dig its heels in or whether it will relax a little. Interestingly, even though as of now, all factors are favourable for a cut, there has been significant hawkish talk from the RBI that suggests they are not ready yet. Of course, whether or not the rate is cut in December, the economy is not looking to grow beyond 5.5% this year. Neither is the investment cycle going to kickstart soon enough. A rate cut will however improve consumer markets in the upper income category. Further ahead, moving beyond 6% growth next year needs many more significant changes on the ground, and those moves can only come from the government.