Graphics: Ahmed Raza Khan / Mint

Graphics: Ahmed Raza Khan / Mint

Industrial production growth falls short; RBI may hold off rate rise

Industrial production growth falls short; RBI may hold off rate rise

New Delhi: India’s industrial production grew less than forecast, suggesting the central bank may wait for more signs of economic recovery before raising interest rates.

Output at factories, utilities and mines rose 10.3% in October from a year earlier after gaining a revised 9.6% in September, the statistics agency said in New Delhi on Friday. That was less than the median 12% estimate in a Bloomberg survey of 20 economists.

Graphics: Ahmed Raza Khan / Mint

The rupee pared gains and stocks fell after the report on investor concerns that India’s rebound from the worst global recession since the 1930s may not be as strong as expected. That presents a challenge to Reserve Bank of India (RBI) governor D. Subbarao, who earlier this week said the central bank may need to act if high food price inflation persists.

The Indian currency traded at 46.58 against the dollar compared with the day’s high of 46.49. The Bombay Stock Exchange’s Sensitive index fell almost 1%. Bonds rose, rebounding from an earlier decline, with the yield on the benchmark 6.90% note due July 2019 falling to 7.52% from 7.57% earlier.

Policymakers in India are considering whether they can keep interest rates near record lows without fanning inflation. Wholesale food prices soared 19.05% in the week ended 28 November from a year earlier, the fastest pace in 11 years.

RBI deputy governor Usha Thorat had said on 3 December that India’s exit from a loose monetary policy will be difficult as the economy’s expansion remains dependent on government stimulus.

October’s output growth shows the “stimulus measures are taking effect" and the “recovery is gaining ground", Montek Singh Ahluwalia, deputy chairman of the Planning Commission, said in New Delhi on Friday. “I hope the double-digit growth momentum will be maintained in the coming months."

Manufacturing grew 11.1% in October from a year earlier, compared with a 10% gain in September, mining rose 8.2% from 7.4% in September and electricity increased 4.7%, compared with a 7.9% growth, Friday’s report showed. Consumer goods production rose 11.8% in October, from 9.4% in the previous month.

“The reason for less-than-expected growth is due to fewer working days in October due to festive holidays and should not be read as a demand slowdown", said Sonal Varma, a Mumbai-based economist at Nomura Securities Co., Japan’s largest brokerage. “Double-digit growth shows robust consumer demand compared with last year and I think RBI will raise rates in January."

October had the Hindu festival of Diwali and other holidays, resulting in around 11 non-working days.

Other Asian economies are reporting stronger manufacturing growth as the region benefits from stimulus worth close to $1 trillion (Rs46.5 trillion) and interest rates cut to record lows earlier this year.

China’s industrial production climbed 19.2% in November from a year earlier, according to government figures released in Beijing on Friday. Malaysian factory output rose 0.7% in October, the first increase in 14 months.

“Asian economies continue to strengthen," said Duncan Wooldridge, chief Asia economist at UBS AG in Hong Kong. “We expect Asia to grow 4.5% this year and 7.6% in 2010, with growth taking off on a year-on-year basis in the next few months."

India’s $1.2 trillion economy is also recording accelerating growth. Gross domestic product (GDP) expanded 7.9% in the three months to 30 September from a year earlier, the fastest pace in six quarters.

Economic recovery has been aided by tax cuts and salary increases by the government, as well as interest rate cuts by the central bank.

RBI governor Subbarao has reduced the reverse repurchase rate by 2.75 percentage points to 3.25% from December to April and cut lenders’ reserve requirements. The government stimulus is projected to push the budget deficit to 6.8% of GDP this year, the most in 16 years.

A strengthening economy is boosting Indian demand for products such as cars, plasma screens and refrigerators. India’s passenger car sales leapt 61% in November to 133,687 units, the most in at least five years, on rising demand for Maruti Suzuki India Ltd hatchbacks and Tata Motors Ltd’s Nano.

The prospect of higher consumer spending is inducing overseas companies such General Motors Co., Toyota Motor Corp. and Volkswagen AG to increase bets on India as demand dwindles back home.

Volkswagen AG, Europe’s biggest car maker, had said on 8 December that it plans to double the number of workers at its new factory in India to 2,500 by the end of next year.

“India is a fast growing and big-volume market", said Takakiyo Fujita, general manager of the Indian unit of Sony Corp., the maker of Bravia televisions. “We plan to expand our operations in the coming years considering the always better-than-expected results."