One of the key triggers of the policy rate increase by the Reserve Bank of India (RBI), apart from the hike in minimum support prices of summer-sown crops, was the comfort from a strengthening economic growth.
Gross domestic product (GDP) growth for FY18 was 6.7%, while that of FY19 is estimated to be 7.4%. The fact that much of the growth is coming from a sharp revival in manufacturing augurs well for the future.
RBI’s latest survey on order books and inventories shows that capacity utilization was 75.2% in the fourth quarter of FY18. That is a sharp increase of four percentage points in just four quarters and the highest level in four years. Simply put, factories are getting more orders and idle time is getting reduced. This shows that the output gap—the difference between real and potential growth—would close sooner than later. The fact that the average backlog in orders is up 61% is a sign that demand is surging. Therefore, companies would soon be able to pass on their input cost increases to consumers, thus feeding into inflation.
If the momentum in growth remains, it raises the odds for another rate hike by the central bank soon.