July-Sept GDP growth seen robust, says finance secretary

July-Sept GDP growth seen robust, says finance secretary

New Ddelhi: India’s July-September quarter GDP growth, for which data is due at 11.00 am, is expected to be robust, finance secretary Ashok Chawla said on Tuesday.

India’s economy probably grew an annual 8.3% in the September quarter, after expanding at 8.8% — its strongest pace since the December quarter of 2007 — in the previous three-month period, the median forecast of 29 economists polled by Reuters showed.

Asia’s third-largest economy is expected to grow 8.5% in the current fiscal to March 2011.

Factors To Watch

India’s manufacturing sector expanded in October at a much faster pace than in September, supported by strong output and a sharp rise in new business, the latest purchasing managers’ index (PMI) data showed.

However, India’s volatile industrial output growth slowed unexpectedly in September to 4.4%, led by a decline in capital goods production.

India’s domestic-demand driven economy is expected to grow 8.5% in the current fiscal year.,

Although a pick-up in investment along with monetary tightening have helped ease capacity constraints and curb demand-side inflation pressures, food inflation continues to be stubbornly high and is seen feeding into wider inflation.

The Reserve Bank has warned future inflation risks are largely on the upside as inflationary expectations remain at elevated levels.

Monsoon rains, which are vital for boosting farm production and rural incomes in the nation of more than 1.2 billion people, have been near normal in the four-month annual season that began in June.

This has helped ease the annual food inflation for the sixth consecutive week in mid-November, probably also due to new crop arrivals in the market.

At 8.58%, the annual headline inflation in October was its lowest in 10 months, easing slightly from 8.62% in September.

The central bank has raised its key lending and borrowing rates by a total of 150 basis points (bps) and 200 bps respectively, since mid-March in its efforts to squeeze inflation back to its target of 5.5% by March.

The central bank’s next monetary policy review is on 16 December. Analysts polled by Reuters expect the central bank to raise rates by an additional 25 basis points by the end of the fiscal year that ends in March.

Market Impact

Bond traders expect the central bank to stay put on rates at its December policy meeting, but are pricing in a 25-bps increase in key rates by end-March.

Traders say a stronger-than-expected GDP data could push up the 10-year bond yield to 8.05%, but most expect the movement to be shortlived as buying interest is likely to emerge on hopes of easing inflationary pressures.

The 10-year yield was trading at 7.98% on Monday, little moved compared with its 7.97% close after the last policy review on 2 November when yields dropped 14 bps as the central bank indicated a pause in tightening.

Traders also expect yields to ease if data comes in below expectations.

The swap curve is likely to narrow or widen depending on the data with the longer-tenor swaps likely to react either way.