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Production growth unexpectedly accelerates

Production growth unexpectedly accelerates
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First Published: Fri, May 11 2007. 03 15 PM IST
Updated: Fri, May 11 2007. 03 15 PM IST
Cherian Thomas, Bloomberg
New Delhi: India’s industrial production growth unexpectedly accelerated in March, as the highest interest rates in five years failed to damp consumer spending.
Output at factories, utilities and mines gained 12.9% from a year ago after a revised 10.8% increase in February, the Central Statistical Organisation said in a statement in New Delhi. Economists expected a 10.4% rise.
Faster-than-expected production growth suggests it may take longer for the Reserve Bank of India’s interest-rate increases to damp the enthusiasm of consumers, who last year received the highest wage rises in Asia. Central bank governor Yaga Venugopal Reddy expects the lagged effect of previous rate increases to reduce spending and slow growth this year.
“We expect interest rates to moderate in the medium term on account of lower inflationary expectation,” said Santosh Kamath, chief fixed-income investment officer at Franklin Templeton India in Mumbai, which manages more than $2.5 billion (Rs10,300 crore) in Indian debt. “We are reasonably bullish on bonds.”
Moody’s Investors Service last month said India’s $854 billion economy was showing “classic signs of overheating” including higher-than-acceptable inflation and rapid rupee appreciation driven mainly by strong capital flows.
India’s central bank 24 April forecast economic growth to slow to 8.5% in the year ending 31 March, from 9.2% in the previous year. China’s economy is expected to expand 10% this year, according to the International Monetary Fund.
‘Gradually Slowing’
In March, manufacturing gained 14.1% from 11.9% in the previous month, while electricity output almost doubled to 7.9%. Consumer goods output jumped to 14.2%, according to today’s report.
“The impact on industrial growth will be really visible from April onwards,” said D. H. Pai Panandiker, president, at RPG Foundation, an economic policy group in New Delhi. “Demand is gradually slowing.”
Merrill Lynch & Co. and Franklin Resources Inc. are increasing purchases of Indian government debt, predicting the central bank will end the cycle of nine interest-rate increases since October 2004.
DSP Merrill Lynch Fund Managers Ltd, a unit of New York- based Merrill, last fortnight raised Rs2.8 billion ($68 million) for its first Indian bond fund since 2002. Franklin Templeton India, part of the San Mateo, California-based money manager, doubled holdings of benchmark debt in one of its funds in March. The increase in demand for the securities may bolster prices for Indian bonds, which have slumped since 2004.
Confidence Wanes
The central bank may also refrain from raising interest rates as business confidence in India fell this quarter for the first time in six months as Maruti Udyog Ltd and other companies said sales may slow on higher borrowing costs, said Shashanka Bhide, chief economist at the National Council of Applied Economic Research in New Delhi.
The business confidence index developed the NCAER, based on responses from 590 companies, declined to 151.3 in the current quarter ending 30 June from 157.3 in the previous quarter, the research group said 4 May.
India’s benchmark Sensitive index has been almost unchanged since 1 January as some investors stayed away from buying stocks on concern higher rates will hurt consumption and put the brakes on economic growth.
Cash Rebates
Maruti Udyog Ltd, India’s biggest carmaker, is offering cash rebates to attract buyers who are deterred from purchasing because of higher borrowing costs. Car sales will likely grow about 15% this fiscal year compared with 22% in the previous year, according to Ashutosh Goel, a Mumbai-based analyst for Edelweiss Capital Ltd.
Bajaj Auto Ltd, India’s second-biggest motorcycle maker, reported a 10% fall in sales in April from a year earlier as demand for motorcycles waned.
Commercial banks have increased their lending rates by between 200 basis points and 250 basis points since December. State Bank of India, India’s biggest commercial bank, said on 7 April it will charge its best borrowers 12.75%, the highest since April 1999.
‘Slowed Mildly’
Governor Yaga Venugopal Reddy left the central bank’s key overnight lending rate unchanged on 24 April to support growth as he forecast inflation to slow to 5% this year.
“There have been signs that the economic momentum have already slowed mildly,” said Sebastien Barbe, Hong Kong-based senior economist at Calyon, the investment banking unit of France’s Credit Agricole SA. “The central bank will likely give time for the monetary policy tightening to produce its full effect on inflation.”
Reddy, who raised the benchmark rate six times in the past 16 months to a five-year high, may be relying on the lagged impact of past rate increases to rein in price gains in Asia’s fourth-largest economy, assisted by a strengthening currency and cuts in import taxes.
India’s benchmark wholesale price inflation slowed to 5.66% in the week ended 28 April as higher rates damped demand for manufactured goods and lower import taxes reduced prices of wheat and pulses, the government said today.
Factory production also weakened as exports in March grew at less than half the average pace of the past year as a rising rupee hurt earnings from overseas sales of textiles, steel and other goods.
Exports rose 8.8% to $12.6 billion in March compared with a 21% increase in the year ended 31 March, the Ministry of Commerce and Industry said 1 May. Exports account for two-fifths of India’s industrial production.
— With reporting by Patricia Chua in Singapore, Anil Varma in Mumbai and Santanu Choudhuri in New Delhi
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First Published: Fri, May 11 2007. 03 15 PM IST
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