Industrial growth adds to rate hike pressure3 min read . Updated: 12 Oct 2009, 06:12 PM IST
Industrial growth adds to rate hike pressure
Industrial growth adds to rate hike pressure
New Delhi/Mumbai: India’s industrial output grew at its fastest pace in 22 months in August, boosting the case for higher interest rates although the Reserve Bank of India (RBI) is expected to wait for further signs of sustained recovery before tightening policy.
India’s central bank chief said last week that lifting rates is a question of when, not if, but government officials have stressed the importance of maintaining pro-growth measures and the RBI is expected to hold off on a rate move at its 27 October review, even as bond yields rose after Monday’s data.
“In what has turned out to be a very public debate, it is obvious that while the RBI is thinking hard about the first rate rise, the minister of finance (and no doubt most of the government) is strongly against an early move," wrote Robert Prior-Wandesforde, HSBC senior Asian economist, in a note.
He expects the RBI to lift the cash reserve ratio requirement for banks in early 2010, with an increase in policy interest rates only in the April-June quarter.
The yield on the benchmark 10-year bond rose by 3 basis points after the stronger-than-expected industrial figure, and traders said the 3-month overnight interest rate swap at 3.60 was factoring in a 25 basis point hike.
Industrial output rose 10.4% in August from a year earlier, beating the median forecast in a Reuters poll, and July’s annual growth was revised up to 7.2% from 6.8%, data showed on Monday.
“Inflation is rising, production is rising fast, so logically the data does suggest that it makes sense to move, but the central bank will probably wait it out at this meeting," said Ramya Suryanarayan, an economist at DBS in Singapore, adding rates were unlikely to rise until at least January.
Government officials expected the momentum in industrial output growth to continue in the second half of the fiscal year, which ends in March.
“We are confident in the second half we will see an improvement," Montek Singh Ahluwalia, deputy chairman of the planning commission, told reporters.
India’s industrial output growth, which expanded for the eighth consecutive month, was the fastest since October 2007 but still lagged China’s 12.3% growth in August, the quickest pace there in 12 months.
The September purchasing managers’ index showed the pace of manufacturing activity picked up as domestic demand and factory orders rose.
Consumer durable goods output surged an annual 22.3% as stimulus measures fuelled demand. Manufacturing production rose 10.2% in August, mining output was up 12.9% and power generation rose an annual 10.6%.
Stimulus spending, festivals and lump-sum payouts of a backdated wage increase for government staff are expected to prop up consumer spending and output growth in the December quarter.
Some economists said the data was skewed by a low base of comparison from a year earlier and was not broad-based.
Still, the faster output at factories, mines and utilities has helped offset a decline in farm output after the worst dry spell in nearly four decades was followed by floods in different parts of the country, hurting crops and pushing up food prices.
And the signs of strengthening demand add to pressure on inflation that has been primarily driven by supply-side bottlenecks, over which the central bank has little control.
“I think it gives leverage to RBI to completely concentrate on inflation," said N R Bhanumurthy, professor at the National Institute of Public Finance and Policy in New Delhi, who expects some tightening in monetary policy by March.
“RBI would like to wait for the IIP (index of industrial production) and inflation numbers for the next month," he said.
While the finance ministry expects inflation to hit 5 to 6% by the end of March, private forecasts have said it could reach 8% or more by then.
The RBI, an independent body, consults the government on policy. Last week, finance minister Pranab Mukherjee said it is not time to end pro-growth polices, and that he would discuss policy settings with the RBI governor ahead of the review.
Prime Minister Manmohan Singh said on Friday the economy was likely to grow between 6.3 and 6.5% in 2009-10.
India grew 6.7% in 2008-09 after three years of expansion of at least 9%, and the government is fearful of prematurely choking off recovery in Asia’s third-largest economy.
The RBI cut its main lending rate by 425 basis points between October and April as the global downturn hit the economy harder than expected. It also slashed banks’ reserve requirements and pumped liquidity into markets.