New Delhi: India’s November industrial output grew at its fastest pace in two years, which analysts say will strengthen the case for the Reserve bank of India (RBI) to tighten monetary stance to temper inflationary expectations.
Industrial output rose 11.7% in November from a year earlier, higher than the median forecast of an annual rise of 10% in a Reuters poll and an unrevised 10.3% rise in October, data showed on Tuesday.
The growth was the fastest since October 2007, when the industry grew an annual 12.2%.
Factory output in November, which had expanded just 2.5% in the same month last year, is riding a revival in consumer demand following aggressive rate cuts by the central bank and stimulus through tax breaks after the global downturn.
“This number combined with an expected 7.3% WPI inflation for December, would strengthen the case for monetary tightening by the RBI,” said Gaurav Kapur, senior economist at ABN Amro Bank.
“The central bank may wait until the 3Q GDP release due end of February for hiking policy rates, but is likely to start withdrawing liquidity through a 50-basis points CRR (cash reserve ratio) hike in the 29th January policy review.”
Back pay of about Rs18,000 crore ($3.96 billion) to central government workers in October, the second instalment of a wage pact agreed in 2008, has also helped shore up consumers’ purchasing power.
A private survey found last week the December purchasing managers’ index showed the pace of manufacturing activity jumped to its highest since May on sharp rises in new work and output, while car sales in December rose an annual 40.3%.
India’s industrial output, which grew for the 11th consecutive month exceeded South Korea’s but lagged the figure for neighbouring China. Output in China grew 19.2% in November, while it rose 1.4% in South Korea.
The benchmark 10-year bond yield rose to 7.81% from 7.78% before the data, while the rupee pared some of its loss to be at 45.38/39 per dollar from 45.41/42 before the data.
Consumer durables goods output continued to surge, growing an annual 37.3% in November. Manufacturing production rose 12.7% on year, while mining output was up 10% and power generation rose 3.3%.
Analysts say the rising trend in India’s industrial output may lose momentum when the government begins to pull back fiscal and monetary stimulus starts this year and the low statistical base begins to fade from June.
“The headline IP (industrial production) number is much higher than expected, but it may be the last double-digit growth number for the current financial year,” said ABN’s Kapur.
India’s economy grew an annual 7.9% in the quarter through September, its fastest in 18 months, prompting the finance minister to raise the growth forecast for the current fiscal year to end-March to around 8% from 7.0%.
However, a robust economic rebound and rising prices have put pressure on the central bank to tighten monetary policy.
India’s annual food price inflation rose 18.22% on supply shortages in the week to 26 December. Broader annual wholesale price inflation is expected to have risen to 7.31% in December, higher than 4.78% in November, the median forecast in a poll of 22 economists showed.
The December data, which is due on 14 January will be the last important data for the RBI to gauge price pressures before its policy review on 29 January.
The RBI is widely expected to increase the cash reserve ratio, the level of deposits that banks must keep with it as cash, at its policy review. But economists are divided when it will start hiking rates.