New Delhi: India’s industrial output in January topped forecasts to grow an annual 3.7%, but high inflation is likely to make the Reserve Bank of India (RBI) lift policy rates next week.
The reading was the strongest in three months and compared with a median forecast of 2.9% in a Reuters poll.
The central bank has raised policy rates seven times since last March, and is widely expected to lift rates by another 25 basis points in its next review on 17 March to rein in inflation which is at over 8%.
Industrial output growth in the first eleven months of the current fiscal year to end-March was 8.3%, the government data released on Friday showed.
Industrial output in December was upwardly revised to 2.5% from an initial reading of 1.6%.
“IIP growth at 3.7% for January and an upward revision in the December numbers are very encouraging and in confirmity with several leading indicators like PMI and bank credit growth,” said Rupa Rege Nitsure, chief economist at the Bank of Baroda in Mumbai.
At this pace, IIP for FY11 will be around 8%. This will improve RBI’s comfort level to continue with calibrated tightening.”
In China, where industrial output climbed 13.5% in January, the central bank has raised interest rates three times since January.
Analysts said rate hikes and high inflation in India coupled with base effect may have affected the industrial output growth, but it could again pick up in coming months due to surge in exports and investment in infrastructure sector.
Reserve Bank of India governor Duvvuri Subbarao on Thursday said the central bank was struggling to balance growth and inflation, and was caught between arguments to keep rates low and to raise them.
Capital good output contracted 18.6% compared with an expansion of 57.9% in the year ago period.
The latest factory output reading comes at the heels of data that showed Indian exports in February rising by half, the fastest in 11 months, and could beat the government’s full year target.
However, with crude oil prices near a 2-1/2-year high, that could hit industrial production as well, central banks across Asia are under pressure to act for fear that these costs will fuel broader inflationary pressures in the economy.
Headline inflation in January was at 8.23%, well above the RBI’s perceived comfort zone of 4-5% and compared with its end-March target of 7%.
The most-traded 8.13% 2022 bond rose 1 basis point to 8.05%, after the data. The benchmark five-year swap rate rose 1-basis point to 7.895%.
Manufacturing output, which constitutes about 80% of the industrial production, rose an annual 3.3% in January.
The government has predicted the Asia’s third largest economy could grow at 8.6% in the current fiscal year, the fastest pace in three years, and at up to 9.25% next fiscal.