India’s industrial production growth unexpectedly slowed in February, a deceleration that may be insufficient to stop the central bank from raising interest rates further.
Output at factories, utilities and mines rose 3.6 percent from a year earlier after a revised 3.95 percent gain in January, the government said in a statement in New Delhi today. The median estimate of 30 economists in a Bloomberg News survey was for a 5.1 percent increase.
While production growth moderated, other data including the purchasing managers’ index, car sales and credit expansion have signaled that consumer demand is stoking price risks. Inflation probably accelerated to 8.36 percent last month, exceeding the central bank’s 8 percent forecast, according to the median estimate in another Bloomberg News survey.
“Although the output data are volatile, consumer demand remains strong,” said Meghna Patel, a Mumbai-based economist at STCI Primary Dealer Ltd. “We think the RBI will need to tighten rates more to gain control over inflation.”
She expects the central bank to raise borrowing costs by a quarter of a percentage point at the next monetary policy announcement scheduled for May 3. The Ministry of Commerce and Industry is due to release inflation data on April 15.
The Bombay Stock Exchange’s Sensitive Index fell 1 percent, extending losses for a fifth day. The yield on the 8.13 percent note due September 2022 rose 5 basis points to 8.17 percent as of 3:49 p.m. in Mumbai, the highest level since Feb. 11, while the rupee weakened 0.6 percent to 44.35 to the dollar.
Growth Momentum
Manufacturing rose 3.5 percent in February from a year earlier, slower than the 3.6 percent gain in January, today’s report showed. Mining gained 0.6 percent, while electricity output rose 6.7 percent. Capital goods production slid 18.4 percent.
“Even as industrial production continues to be volatile, other indicators, such as the latest purchasing managers’ index, direct and indirect tax collections, merchandise exports and bank credit, suggest that the growth momentum persists,” the central bank said in a March 17 statement.
India’s industrial output has fluctuated since May, when it registered a 12.2 percent expansion. The growth eased to 7.2 percent in June, rebounded to 15.1 percent in July, slid to 4.9 percent in September and then recovered in October, according to government data.
Rate Increases
The slowdown in factory output is a “concern,” and the March reading is likely to be even lower,Kaushik Basu, chief economic adviser to the ministry of finance told reporters in New Delhi today. It may pick up from April, he said.
Reserve Bank Governor Duvvuri Subbarao raised rates on March 17 for the eighth time in a year, boosting the repurchase rate by a quarter point to 6.75 percent after raising the inflation forecast twice since late January. The price gauge will reach 8 percent at the end of March compared with the 7 percent estimated on Jan. 25, he said.
“In the absence of a strong supply response, increasing demand will inevitably lead to higher prices,” Reserve Bank Deputy Governor Subir Gokarn said April 5. He said a “monetary response is warranted” should demand exceed supply and stoke inflation.
India’s $1.3 trillion economy may expand as much as 9.25 percent in the year ending March 31, 2012, the finance ministry said in February.
Capacity, Loans
Maruti Suzuki India Ltd. (MSIL), the nation’s biggest carmaker, plans to boost capacity by 21 percent in the current financial year as part of investment plans totaling as much as 40 billion rupees ($908 million), Chief Financial Officer Ajay Seth said in an interview on April 6. The company’s sales climbed to a record in March.
Recent data on bank loans show lenders are giving loans at a faster pace than the central bank’s target. Commercial loans rose 23 percent from the previous year as of March 11, more than the 20 percent rate prescribed by the Reserve Bank of India.
Manufacturing grew for a 24th straight month, with the purchasing managers’ index holding unchanged at 57.9 in March from February, when it accelerated at the fastest pace in three months, HSBC Holdings Plc and Markit Economics said April 1.
“Strong consumption and supply constraints are together responsible for the high inflation,” saidRamya Suryanarayanan, an economist at DBS Group Holdings Ltd. in Singapore. The central bank needs to extend rate increases to restrain prices, she said.
Budget Boost
Salaries in India this year may rise the most in the Asia- Pacific region, fueling consumer demand, a survey by Aon Hewitt LLC showed March 8. Spending under the government’sNational Rural Employment Guarantee Act of 2005 has surged almost fourfold to 399 billion rupees.
Demand may find more support from Finance Minister Pranab Mukherjee’s budget for the fiscal year ending March 31, 2012, that plans to spur spending and exempt incomes below 180,000 rupees from tax, higher than the previous threshold of 160,000 rupees.
Prime Minister Manmohan Singh’s coalition aims to put more money in the hands of voters to help them cope with rising prices and shore up support for five state elections in 2011.
Rising oil and commodity costs and sustained economic growth are escalating pressure on Asian central banks to boost borrowing costs. China on April 5 raised rates for the fourth time since October. Vietnam, Taiwan, South Korea and Thailand increased borrowing costs in March or April to curb inflation.
India relies on imports to meet three-quarters of its annual energy needs.
To contact the reporter on this story: Kartik Goyal in New Delhi at kgoyal@bloomberg.net
To contact the editor responsible for this story: Stephanie Phang at sphang@bloomberg.net
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