Oct industrial output surges, rate dilemma seen

Oct industrial output surges, rate dilemma seen

New Delhi: India’s industrial output in October rose more than 10% from a year earlier, suggesting the economy maintained a healthy growth rate after a strong September quarter.

Analysts said the output figures reinforced their views of the economic outlook, so would support expectations that the central bank would have to start raising interest rates in the first half of next year.

Industrial output rose 10.3% in October from a year earlier, matching the median forecast in a Reuters poll. September’s annual growth was revised up to 9.6% from 9.1%, data showed on Friday.

The figures suggested the economy was maintaining healthy momentum after annual GDP growth hit 7.9% in the September quarter, its strongest in 18 months.

That was further backed by car sales, which surged in November by 61% from a year earlier.

“Going forward, we expect IIP to clock growth around 9-12% with support coming from a low base," said Shubhada Rao, chief economist at Yes Bank in Mumbai.

Analysts said the rise from a year earlier was exaggerated by a weak output in October 2008, when the economy was hit harder than expected by the global downturn. The overall level of output was also the lowest since May.

“We do not expect rate action from the RBI in the current fiscal (year). However, it may get difficult for the RBI to ignore food inflation and may have to tighten liquidity through a CRR hike by Dec/Jan," Rao said, referring to cash reserve ratio, or bank reserve requirement.

The stock market swung from 1% higher to slightly down on the day and 10-year bond yields fell 5 basis points to 7.51% after the data as there had been some market expectations for stronger output growth.

Aggressive rate cuts by the central bank and heavy doses of government spending have revived factory output, which slowed to 2.6% in the 2008-09 fiscal year (April-March) from 8.5% in 2007-08.

Consumer durables goods output continued to surge on the back of stimulus spending, growing an annual 21% in October. Manufacturing production rose 11.1% on year, while mining output was up 8.2% and power generation rose 4.3%.

India’s industrial output, which grew for the 10th consecutive month, still lagged neighbouring China, which posted annual factory output growth of 19.2% in November, its fastest pace since June 2007.

Food, tightening

After focusing on getting the economy growing again, inflation has also returned as a concern for policymakers.

The Reserve Bank of India has said it needs to strike a balance between growth and inflation, but has also noted most inflation pressures are coming from food supply shortages, where monetary policy is not an effective tool.

Governor Duvvuri Subbarao has said the danger was that food price inflation -- running at an annual 19.05% at end-November -- spilt over into broader inflation expectations.

“Recent RBI comments have already indicated that tighter policy is on the way, and this number should reinforce the case for a rate hike early next year," said Brian Jackson, economist at Royal Bank of Canada in Hong Kong.

He expected the central bank to move on rates in the first quarter and forecast 175 basis points of rate increases over 2010. The central bank’s repurchase rate is currently 4.75% and the reverse repurchase rate is 3.25%.

At its October policy review, the Reserve Bank of India left its key rates steady, but began scaling back its stimulus by removing some of the liquidity support measures implemented to help India weather the effects of the global downturn.