After a long time, there has been some good news on the economic front. The Index of Industrial Production (IIP) for November released recently showed the output rebounding sharply; it rose by 5.9 per cent after contracting by 5.1 per cent in October. The headline inflation rate (Wholesale Price Index) that remained stubbornly high dipped to 7.47 per cent in December, its lowest since 2009. The rate of inflation was close to double digits during most of 2011, and in November it was above 9 per cent. Of special significance ahead of the Assembly elections across five States is the sharp deceleration in food inflation, which has helped push the monthly WPI inflation down. The rupee, which fell drastically in November and December last year, appears to have stabilised since the beginning of 2012. The domestic stock markets, of course, continue to be volatile, and the trading is nowhere near the peak. But it is of some comfort that they have not declined as much as many expected they would.

These are certainly welcome news, but it would be premature to conclude that the worst is over and economic recovery is round the corner. Macroeconomic data and corporate performance have not been inspiring so far, and global cues, especially from the crisis-ridden euro zone countries, have not helped either. Both industrial output data and inflation numbers need to be examined more closely to ascertain whether they indeed portend better times. The IIP numbers have been notoriously fickle. The November figures, for instance, were boosted by just two or three factors and do not suggest a broad-based revival. For one thing, electricity generation was up by 14.6 per cent. Whether this spectacular growth can be sustained is a difficult question, given the power sector's problems on the financial front and the shortage of coal. The 13 per cent increase in consumer demand was attributable to the festival season. On the other hand, capital goods production continues to shrink and the demand for credit has not picked up. Lower inflation has been possible partly because of the base effect: in December 2010 inflation had touched 9.45 per cent. Manufactured goods inflation remains elevated. All these will no doubt weigh with the RBI when it unveils the next instalment of the credit policy early next week. After hiking the rates more than a dozen times over a period of 18 months, it paused in December amidst slowing industrial production. It is doubtful that the recent good news, by themselves, will help the RBI resolve its dilemma, whether the interest rates should be cut or left untouched.

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