Inflation up, IIP down. What will the RBI do?

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Inflation up, IIP down. What will the RBI do?
A quote from Lorenz Hart is the best way to describe reaction to economic data that keeps coming in: “Bewitched, Bothered and Bewildered”.

On Monday, the inflation data that came in at 7.26%, positively surprised on the upside, while the IIP data that came in last week surprised on the downside.

The RBI looks at key data including growth and inflation, while deciding on repo rate cuts. The negative IIP data suggests that industrial output and hence growth have turned negative, and hence it must cut repo rates (interest rates) to revive growth of a sagging economy.

Now, inflation data which came in on Monday was surprisingly higher than expected at 7.26%, against a broad consensus estimate at around 6.86%. Therefore, the RBI cannot go ahead and simply cut rates, as inflation is still high.

The central bank seems to clearly be at the crossroads. One one hand it has high inflation and cannot cut repo rates, and on the other, it has industrial output which has turned negative, which makes it imperative to cut rates.If it does not cut repo rates, interest rates remain elevated, affecting economic growth rates (GDP), which has dipped to 6.9% during 2011-2012.

Clearly, it's a case of “being stuck between the devil and the deep blue see”.

Read more about: iip, inflation
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