India’s industrial production growth slowed for a third straight month in February as higher interest rates crimped demand for cars and homes. Production at factories, utilities and mines rose 11% from a year earlier, less than January’s revised 11.4% increase, the Central Statistical Organization said in a statement . Analysts had predicted an 11.2% gain.
The International Monetary Fund (IMF) and the Asian Development Bank (ADB) expect India’s economic expansion to slow as the central bank’s two and half-year policy of increasing rates to combat inflation may hurt consumer spending. Finance minister P. Chidambaram on Wednesday said the government’s goal is to moderate inflation without affecting growth and that the Reserve Bank of India (RBI) is aware of its responsibilities.
“There will definitely be a moderation in growth in the current fiscal year because of the impact of interest rates,” said N.R. Bhanumurthy, an economist at the Institute of Economic Growth in New Delhi. Climbing interest rates will slow growth in Asia’s fourth- largest economy to 8.4% in the year starting 1 April, IMF said on Wednesday. ADB and Goldman Sachs Group Inc. estimate the economy to grow 8% this year. India’s economy probably grew 9.2% in the year ended 31 March, according to the government forecast.
Production trailed expectations as output of consumer durable goods expanded 1.6% in February, slower than January’s 5.3%. Electricity production slowed to 3.3% from 8.3% in January, according to Thursday’s report. Manufacturing output increased 12.3%, almost unchanged to January’s output increase, the report said.
RBI governor Y.V. Reddy on 30 March unexpectedly raised the cash reserve ratio for the third time since December and increased the benchmark overnight lending rate for the sixth time in 15 months.
Commercial banks have increased their lending rates by between 200 basis points and 250 basis points in the past four months. State Bank of India said on 7 April it will charge its best borrowers 12.75%, the highest since April 1999.
Reddy wants to slow bank loans that have grown at a record 30% in each of the past three years, stoking inflation, which was near a two-year high of 6.39% in the week ended 24 March. Reddy had forecast inflation to be between 5% and 5.5% by 31 March.
Firms including Ashok Leyland Ltd have said rising rates will hurt demand for commercial vehicle manufacturers. Bajaj Auto Ltd on 1 April said sales declined 9% in March.
“We are upbeat about India’s long-term prospects,” said Keith Gyles, international economist at Capital Economics Ltd in London. “If the Indian government can press on with its infrastructure programme, while opening more sectors to foreign competition, growth could well be lifted into the 8-9% range.”
The Centre plans to increase infrastructure spending by 40% to Rs13,4,000 crore in the year starting 1 April in a bid to attract more overseas manufacturing companies.