Bangalore: India’s manufacturing sector expanded at its fastest rate in over two years in May, bolstered by steady growth in output and new orders, reinforcing expectations of a further hike in interest rates late next month.
Automakers also posted sharp sales growth for May, although stocks dropped more than 2% on fears that Europe’s debt problems would hurt fund inflows from foreign investors and potentially derail the global economic recovery.
Many economists and traders expect worries about the euro zone debt crisis will keep the Reserve Bank of India (RBI) from raising its policy rates before its next quarterly review on 27 July, as some market watchers had earlier predicted.
But the central bank is still expected to raise rates by 25 basis points at the July meeting as it struggles to contain mounting price pressures. It has already increased rates by 50 basis points since mid-March.
“Inflation is not at peak level. It is still higher than we would like it,” RBI Governor Duvvuri Subbarao said on Tuesday.
Monsoon rains arrived in southern India on time on Monday, and policymakers will keep watch on how the rainy season pans out after last summer’s drought sent food prices sharply higher.
In a sign economic growth is accelerating, the HSBC Markit Purchasing Managers’ Index (PMI), based on a survey of 500 firms, surged to a 27-month-high of 59.0 in May from 57.2 in April.
It was the 14th consecutive month that the indicator has been above the 50 mark that divides growth from contraction. The rate of growth had slowed in March and April.
“The tightening mode of policy will continue but the timing and quantum of hikes will also be dependent on the evolving global situation. Today’s data does aid a tightening bias...,” said Namrata Padhye, an economist with IDBI Gilts in Mumbai.
Another report showed Indian exports rose an annual 36 percent in April, their sixth straight rise, although the figure was flattered by weak shipments last year and could take a knock if the euro zone debt crisis worsens and saps demand.
“The Indian economy is hardly pausing for breath,” said Frederic Neumann, co-head of Asian Economics Research at HSBC.
“Output growth remains at a robust pace and new orders continue to pour in. This is benefiting the job market as more and more firms are hiring,” he added.
The new orders index climbed to 63.7 in May from 61.9 in April, mainly driven by domestic demand, the PMI report showed. It was the 14th consecutive month when new orders expanded.
The employment index rose to its highest since August 2005, signalling modest job creation across the economy.
On Monday, data showed India’s economy grew 8.6% in the March quarter, the strongest in six months.
Investors, however, largely ignored the bullish domestic reports, with Indian shares falling 2.2% on doubts over the health of the global recovery. The yield on the 10-year benchmark bond eased one basis point to 7.55%.
Maruti Suzuki, the country’s largest car maker, reported record monthly sales, which rose 28 percent annually in May, and utility vehicles leader Mahindra & Mahindra posted a 69% jump.
While such figures point to a sharp improvement in business conditions and consumer confidence, prices remain a worry as Asia’s third-largest economy battles stubbornly high inflation.
Wholesale prices, the Reserve Bank of India’s most closely watched gauge of inflation, eased slightly in April to 9.6%, but are not far from 10.1% seen in February, which was the highest since October 2008.
“Price pressures are of concern. However, the recent readings point to a stabilisation, with both the input and the output price indices easing a little in May,” Neumann said.
On Tuesday, other PMI data from export-dependent countries like China showed a slowdown in growth amid uncertainty over the fallout from Europe’s debt crisis.
An Indian government official said the country’s April trade numbers did not reflect the possible impact of Greece’s debt crisis on trade.
April imports rose 43% from a year earlier to $27.3 billion, data showed. Non-oil imports grew 34% in April to $19.2 billion, reflecting healthy industrial activity.
Indian exports have shown strong growth in the past half year. Exports had dropped 4.7% in the fiscal year 2009/10 as the global slowdown dampened demand. The trade deficit stood at $10.4 billion in April.