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May industrial output up 11.5%, maintaining rate pressure

May industrial output up 11.5%, maintaining rate pressure

New Delhi: India’s industrial output grew at a slower-than-expected 11.5% from a year earlier, but expectations of a central bank rate hike for the second time this month remain unchanged due to inflationary pressures.

Factory output rose in double digits for the eighth straight month in May, helped by robust domestic consumer demand, expanding exports, and higher infrastructure spending.

The median forecast in a Reuters poll was for an annual rise of 16%.

The Reserve Bank of India (RBI) is widely expected to raise rates by another 25 basis points at its policy review on 27 July, after it surprised markets early this month with a quarter-point rate hike.

The partially convertible rupee eased to 46.70/71 per dollar, from 46.66/67 just before the factory data. It had closed at 46.66/67 on Friday.

The 10-year bond yield edged lower to 7.61% from 7.63% before the data. It had closed at 7.65% in the previous session.

Manufacturing production in Asia’s third-largest economy rose 12.3% in May from a year earlier, while mining output was up 8.7% and power generation rose 6.4%.

Production of capital goods rose 34.3% year-on-year after an annual rise of 72.8% in April, while consumer durables output grew 23.7%, down from a 37% rise in the previous month.

Indian economy is forecast to grow 8.5% in the current fiscal year that started on 1 April, after expanding 7.4% last year.

Inflationary Pressure

But, a robust economic growth is also seen stoking demand-side inflationary pressures. Most central banks in Asia have now started tightening monetary policy as inflation is beginning to become a major worry in a region that leads the world in recovering from the global crisis.

On Friday, the Bank of Korea raised interest rates for the first time since the outbreak of the global financial crisis, joining regional peers from Australia, New Zealand, India, Taiwan and Malaysia in the campaign to return policy to pre-crisis mode.

In India, the RBI has raised rates thrice by a total of 75 basis points since mid-March to battle against headline inflation that stood at 10.16% in May after hitting 11.04% in March.

The government’s decision to free up petrol prices and raise other state-subsidised fuel prices is expected to further stoke inflationary pressures and immediately push up headline inflation by around one percentage point.

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