Can a bounce back in IIP, induce RBI to keeps interest rates high for long?

The Index of Industrial Production (IIP), after showing a slump in growth in the month of September 2012, bounced backed in October 2012. A favourable base effect helped the industrial output to touch 8.2%, it being the highest since the level clocked in June last year. Earlier in the month the core sector data of 6.5% for October 2012 also hinted that IIP could be better, and indeed it did.

Stronger upticks in manufacturing index, consumer goods index (both consumer durables and consumer non-durable), and capital goods had a bearing on the IIP data. 

But we are of view that, going forward industrial growth can occur with a lag, although slew of reform measure have been taken by the Government. There are yet many crucial bills which are awaiting clearance (such as the Pension Bill, Banking Law Amendment Bill, Insurance Bill, Real Estate (regulation & development) Bill), in the winter session of the Parliament; which are needed for inclusive growth to occur. 

The bounce back in IIP as mentioned earlier is a result of a favourable base effect and the advantage which the data has enjoyed by it being for the immediately preceding month before Diwali (which was celebrated in November 2012 this year), where industrial output is generally high in order to meet festive demand.

Can the RBI hold the interest rate at elevated for long? Well, the bounce back could be an excuse for the RBI not to reduce policy rates in it 3rd quarter mid review of monetary policy 2012-13 (scheduled on December 18, 2012) since WPI inflation is yet over the comfort zone and not showing signs of moderation. But going forward from the first quarter of the new calendar year, we could see policy rates being cut gradually taking into account growth-inflation dynamic, liquidity condition and external developments.