Impact of the June Interest Rate Cut Proves to be Short-Lived
Business confidence dipped slightly in July and output and orders growth moderated as exporters reported weaker demand. The MNI India Business Sentiment Indicator, a gauge of current sentiment among BSE-listed companies, fell by 2.7% to 65.3 in July from 67.1 in June.
The fall in sentiment was observed across both manufacturing and services companies, while construction companies were the most confident in July. June's boost to confidence was partly driven by the interest rate cut by the Reserve Bank of India early in that month, although it is positive to see that not all those gains have been given up in July. Previous rate cuts have also provided similar boosts to business sentiment this year but their impact has proved to be short-lived. Sentiment remains lacklustre, having improved by just 1.7% since the start of the year and is still down 6.7% on July 2014, although at least it has managed to stay above the May low.
Production, New Orders and Export Orders declined in July following healthy improvements in June. Production fell 4.9% on the month to 58.1, 7% below the level seen at the start of the year as New Orders slipped back. Export Orders fell sharply on the month and are down nearly 8% on the year.
Input prices fell slightly in July ending four months of rises. The period of weak inflation, however, is over with Input Prices 11% above the level seen in January 2015. Companies have, though, been reluctant or unable to pass on rising input costs to customers with the Prices Received Indicator having remained broadly stable since the start of the year.
Companies acknowledged that central bank rate cuts have fed through to lower interest rates for them in recent months. Credit availability, though, has remained broadly stable since the start of the year.
Commenting on the latest survey, Chief Economist of MNI Indicators Philip Uglow said, "July saw business sentiment ebb slightly following June's improvement on the back of the last rate cut from the RBI. The MNI India Business Sentiment Indicator is now lying a little below the 12-month average, while production is not too far from a two-year low. While the real economy would benefit from a further rate reduction from the RBI, the central bank's hands are to some extent tied by the profile for inflation ahead and we expect them to keep rates on hold at the August 4 meeting."
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