Higher interest rates slow industrial output

Higher interest rates slow industrial output
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First Published: Fri, May 11 2007. 12 36 AM IST

Updated: Fri, May 11 2007. 12 36 AM IST
India’s industrial production in March probably grew at the slowest pace in five months as higher interest rates cooled demand for two-wheelers, cars and homes.
Output at factories, utilities and mines gained 10.4% from a year earlier after an 11% increase in February, according to the median forecast of 13 economists in a Bloomberg survey. The Central Statistical Organization will release the production numbers in New Delhi on Friday.
Business confidence in India fell this quarter for the first time in six months as Maruti Udyog Ltd (MUL) and other companies said sales may slow on higher borrowing costs. The Reserve Bank of India (RBI) may soon end its two-and-a-half year policy of raising rates to curb inflation in the world’s second-fastest growing major economy, according to nine of 11 analysts in a Bloomberg survey two weeks ago.
“The tightened monetary conditions designed to contain the inflationary effects of overheating in the economy may have led to the decline in confidence among companies,” said Shashanka Bhide, chief economist at the National Council of Applied Economic Research (NCAER) in New Delhi. “The pace of industrial output will slow.”
The business confidence index developed by 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 had said on 4 May.
MUL, India’s biggest carmaker, is offering cash rebates to attract buyers who are deterred from purchasing because of higher borrowing costs. Car sales rose 2.9% in March from a year earlier, the slowest gain in 13 months, the Society of Indian Automobile Manufacturers had said last month.
Commercial banks have increased their lending rates by between 200 and 250 basis points since December. The State Bank of India had said on 7 April that it will charge its best borrowers 12.75%, the highest since April 1999.
RBI governor Y.V. 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.
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 5.77% in the week ended 21 April as higher rates damped demand for manufactured goods and lower import taxes reduced prices of wheat and pulses, the government had said on 4 May.
India’s 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 (Rs51,660 crore) in March compared with a 21% increase in the year ended 31 March, the ministry of commerce and industry had said on 1 May. Exports account for two-fifths of India’s industrial production.
The International Monetary Fund expects growth in India’s $854 billion economy to slow to 8.4% in the year ending 31 March from 9.2% in the previous year. China’s economy is forecast to expand 10% this year.
“It seems likely that the economy has now passed its cyclical peak,” said Robert Prior-Wandesforde, an economist at HSBC Holdings Plc. in Singapore. “The slowdown largely reflects the cumulative impact of monetary tightening.”
To support growth, the Centre plans to increase infrastructure spending by 40% to Rs1.34 lakh crore this year in a bid to attract more overseas manufacturing companies. The government is also seeking investments of $320 billion by 2012 to improve roads, airports and other infrastructure to attract foreign companies, create jobs and sustain growth of over 9% in the next decade to eradicate poverty.
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First Published: Fri, May 11 2007. 12 36 AM IST
More Topics: Economy and Politics | Indicators |