No sign of economy cooling, RBI may have to intervene: analysts

No sign of economy cooling, RBI may have to intervene: analysts
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First Published: Tue, Feb 27 2007. 01 47 AM IST
Updated: Tue, Feb 27 2007. 01 47 AM IST
New Delhi: India’s economy probably accelerated for a second quarter, surging towards a record annual growth rate that has pushed inflation to a two-year high. Asia’s fourth-largest economy grew 9.3% in the three months to 31 December from a year earlier, quicker than the previous quarter’s 9.2%, according to the median forecast of 10 analysts in a Bloomberg survey. The Central Statistical Organization report is due 28 February.
Accelerating growth reflects the fastest expansion in bank loans in more than 30 years and higher salaries that have fuelled spending on cars, mobile phones and houses. That’s stretching the production capacity of Maruti Udyog Ltd and Tata Steel Ltd and fanning inflation, which may prompt the Reserve Bank of India (RBI) to raise interest rates at a meeting on 24 April.
“Price pressures will remain strong as a result of robust economic growth and rapid credit creation,” said Aathira Prasad, an economist at DBS Group Holdings Ltd in Singapore. “There is no evidence whatsoever of any cooling down in the economy. Further monetary policy tightening is on the cards.”
The Centre expects the Rs38 lakh crore economy to expand 9.2% in the year to 31 March. Growth has averaged 8.6% in the past four years, the quickest pace since Independence, and made India the world’s second fastest-growing major economy after China.
“Consumer demand has been exceptionally strong,” said Anil Gupta, joint managing director at Havell’s India Ltd, the nation’s biggest maker of household switches, whose shares have doubled in the past year. Maruti sold 54,372 cars in January, the highest-ever for any month.
Tata, which acquired the UK’s Corus Group last month for $12 billion, said its production has not been able to keep pace with the growing demand for steel by automobile makers. India’s industrial production, a quarter of the economy, surged a more-than-expected 11.1% in December after a 15.4% gain in November, the fastest since April 1995.
Growth is accelerating as RBI’s overnight lending rate is still half the level it was six years ago, even after the central bank raised the key rate six times by a quarter-point since October 2005 to 7.5% to slow loans growth and inflation, currently at 6.63%.
Commercial banks’ loans to companies and consumers have risen an average 30% in each of the past three years, according to central bank data. The pace is the fastest since RBI started collating data in 1971. According to a Mercer Investment Consulting Inc. survey, Indian workers had the biggest salary increase in 2006 among 70 countries, including the US, the UK and Japan. Indians will continue to have the largest salary rises in 2007, according to human resources consultant ECA International, which forecasts a 7% increase in annual real salary.
“Besides manufacturing, services like telecommunications are adding to the growth momentum,” said Sumita Kale, chief economist at Indicus Analytics. “We expect the economy to slow to about 8.5% growth in the next quarter. Higher interest rates will get impacted across the board.”
Services such as telecommunications and banking make up more than half of India’s economy. Bharti Airtel Ltd, India’s biggest mobile phone company, reported Q3 profit more than doubled to a record. Accelerating growth helped Sensex to gain 40% in the past year, led by Bharti Airtel and Reliance Industries Ltd.
“Indian data show that the economy is at increasing risk of overheating,” said Keith Gyles, international economist at Capital Economics Ltd in London. “RBI is therefore likely to hike interest rates further, perhaps before the next monetary policy meeting in April.”
RBI has over the past two years tried three different policy tools to contain inflation—the reverse repurchase rate, or the overnight borrowing rate, the repurchase rate, or the overnight lending rate, and the cash reserve ratio.
On 13 February, it unexpectedly increased the cash reserve ratio, ordering commercial banks to keep cash equivalent to 6% of deposits starting 3 March from 5.5%. The measure was aimed at draining as much as Rs14,000 crore from the system, it said. The move came after it raised the overnight lending rate on 31 January for the fifth time in a year.
Patricia Chua in Singapore contributed to this story
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First Published: Tue, Feb 27 2007. 01 47 AM IST
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