Industrial output growth probably slowed in May

Industrial output growth probably slowed in May

India’s industrial production growth probably slowed for a second month in May as higher interest rates damped consumer demand and currency gains weakened exports.

Output at factories, utilities and mines rose 12% from a year earlier, following a 13.6% increase in April, according to the median forecast of 15 economists in a Bloomberg survey.

The Central Statistical Organisation will release the production numbers on Thursday.

Hero Honda Motors Ltd, India’s biggest motorcycle maker, had said last week it plans to delay opening its third factory as demand wanes.

The Reserve Bank of India, which has allowed the rupee to rise to a nine-year high to make imports cheaper and curb inflation, may leave interest rates unchanged in its next monetary policy statement on 31 July. “Monetary tightening and sharp exchange rate appreciation have affected demand for manufactured goods," said Sujan Hajra, chief economist at Anand Rathi Securities Pvt. Ltd in Mumbai. “The central bank may maintain current interest rates at least for the next three months," he said.

Industrial growth seen at 12% (Graphic)

The Reserve Bank has increased its key overnight lending rate six times in the past 18 months, and raised its cash reserve ratio three times since December, to slow the fastest pace of loan growth in more than 35 years.

Growth in loans to consumers and companies slowed to 24.6% in the year to 22 June compared with a 31% gain in the same period last year, the central bank had said on 6 July.

That’s helped ease demand for motorcycles, cars and other products and slowed inflation to near a 13-month low of 4.13% in the third week of June. Hero Honda, which postponed beginning production at its third factory to April 2008 from a planned October start, suffered an 8.4% decline in sales in June as demand for its CD Deluxe and CBZ X-treme models declined.

“High interest rates are leading people to postpone their purchases," said Ravi Sud, chief financial officer at New Delhi-based Hero Honda.

Maruti Udyog Ltd, India’s biggest car maker, said this month it may not be able to match last year’s sales growth, partly because higher interest rates are curbing demand.

India’s 10-year bonds advanced, pushing yields to the lowest in more than four months, on speculation banks used their surplus funds to buy debt.

Industrial production, which accounts for a quarter of the economy, may also slow because of weak exports after the rupee surged to a nine-year high. The central bank has slowed dollar purchases on concern that rupee funds injected from intervention will stoke inflation.

Exports, which account for two-fifths of India’s industrial output, rose 18% in May after increasing 23% in the previous month. The rupee has gained 9.6% against the dollar since 1 January.

India’s central bank expects the economy, Asia’s fourth- biggest, to expand 8.5% in the year to 31 March, slower than the 9.4% pace in the previous year. The benchmark Sensitive stock index has risen 8.9% this year after a 47% gain in 2006.

To support growth, the United Progressive Allaince government plans to increase infrastructure spending by 40% to $33.2 billion (Rs1.34 trillion) this year in a bid to attract more overseas manufacturing companies.

The government estimates India may need between $320 billion and $475 billion by 2012 to improve roads, airports and other infrastructure to attract foreign companies, create jobs and sustain growth faster than 9% in the next decade to eradicate poverty.