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IIP grows at fastest pace in 3 months

IIP grows at fastest pace in 3 months
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First Published: Fri, Dec 10 2010. 11 16 PM IST
Updated: Fri, Dec 10 2010. 11 16 PM IST
New Delhi: Industrial production grew at the fastest pace in three months, threatening to strain power and transportation capacities, and stoke inflation. Stocks rose.
Output at factories, utilities and mines rose 10.8% in October from a year earlier after a 4.4% increase in September, the statistics office said in a statement in New Delhi on Friday. The median estimate of 29 economists in a Bloomberg survey was for an 8.5% gain.
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Reserve Bank of India (RBI) governor D. Subbarao said this week that inflation remains above “tolerance level”, as the country battles rising prices along with China.
India may raise interest rates in January after pausing at the next policy meeting on 16 December because of a cash crunch at lenders, said economists at Kotak Mahindra Bank Ltd and Nomura Holdings Inc.
“This kind of strong growth will accentuate the pressure on inflation and calls for further monetary tightening,” said Sonal Varma, a Mumbai-based economist at Nomura, Japan’s biggest brokerage. “We think RBI is likely to raise rates in the January to March quarter.”
The Bombay Stock Exchange’s Sensex rose for the first time in four days, climbing 1.4%. Ten-year government bond yields fell four basis points to 8.08% at close in Mumbai. The rupee advanced 0.4% to 45.05 against the dollar. One basis point is one-hundredth of a percentage point.
The central bank’s goal is to keep the benchmark wholesale price inflation rate between 4% and 4.5%. It may slow to an 11-month low of 7.5% in November, according to the median of 26 estimates in a Bloomberg survey. The commerce ministry is scheduled to announce the data on 14 December.
In China, where industrial output rose 13.1% in October from a year earlier, inflation is accelerating following an unprecedented credit expansion, a result of efforts to protect the economy from last year’s global recession. Consumer prices rose 4.4% in October from a year earlier, the fastest pace in two years.
The People’s Bank of China on Friday raised lenders’ reserve requirements for the third time in five weeks. In October, it increased the interest rate for the first time since 2007.
RBI, which has boosted rates six times this year, the most by any central bank in Asia, said on 2 November that it probably won’t raise rates until January, giving itself time to see the impact of its monetary tightening. India’s benchmark repurchase rate is 6.25%.
Manufacturing grew 11.3% in October after a 4.6% gain in September, Friday’s report showed. Electricity production climbed 8.8%, while mining rose 6.5%.
A cash squeeze at banks after companies, including Coal India Ltd, raised funds from share sales and businesses withdrew money to pay taxes, may also prompt Subbarao to keep borrowing costs unchanged for now, according to Anubhuti Sahay, an economist at Standard Chartered Plc in Mumbai. Coal India raised Rs.15,200 crore in October in the nation’s biggest initial share sale.
Commercial banks borrowed an average Rs80,900 crore a day this quarter using RBI’s repurchase-auction window, compared with Rs23,900 in the previous three months, according to data compiled by Bloomberg, indicating a shortage of funds at lenders.
Subbarao said on Thursday that RBI was conscious of the liquidity situation at banks, and that it will take some steps as may be necessary.
RBI on Thursday conducted an auction to purchase Rs12,000 crore of securities to ease liquidity. Deputy governor Subir Gokarn told reporters in Kolkata this week that the move to replenish funds in the banking system isn’t a sign of a change in the central bank’s monetary policy stance.
“Inflation will remain a problem for a long while,” D.H. Pai Panandiker, president of the RPG Foundation, an economic policy group in New Delhi, said before the production data was released. “When consumer demand rises amid infrastructure constraints, it pushes up the cost of doing business.”
India has a power deficit of 10.5% during peak hours, the Central Electricity Authority estimates, forcing most companies to invest in their own supply back-ups. “The target to add 62,000MW of generation capacity in the five years to March 2012 may be missed by about 4,000MW,” the government said on Thursday.
“There is a real risk of inflation accelerating in the coming months due to strong growth,” said Dharmakirti Joshi, a Mumbai-based economist at Crisil Ltd, the local unit of Standard and Poor’s Ratings Services. “RBI may consider raising rates in January.”
Foreign manufacturers are investing more in India to benefit from growing demand in the country of 1.2 billion people. Daimler AG this week announced plans to invest as much as Rs350 crore by 2012 to expand its India factory that makes Mercedes-Benz cars.
Manish Modi contributed to this story.
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First Published: Fri, Dec 10 2010. 11 16 PM IST
More Topics: India | Industry | Output | Index | Manufacture |