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Industry growth accelerates, RBI action seen

Last Updated: Tuesday, January 12, 2010 - 16:23

New Delhi: India`s November industrial output grew at its fastest pace in two years, which analysts say will strengthen the case for the Reserve Bank of India (RBI) to tighten monetary stance to temper inflationary expectations.

Industrial output rose 11.7 percent in November from a year earlier, higher than the median forecast of an annual rise of 10 percent in poll and an unrevised 10.3 percent rise in October, data showed on Tuesday.

The growth was the fastest since October 2007, when the industry grew an annual 12.2 percent.

Factory output in November, which had expanded just 2.5 percent in the same month last year, is riding a revival in consumer demand following aggressive rate cuts by the RBI and stimulus through tax breaks after the global downturn.

"This number combined with an expected 7.3 percent WPI inflation for December, would strengthen the case for monetary tightening by the RBI," said Gaurav Kapur, senior economist at ABN Amro Bank.

"The RBI may wait until the 3Q GDP release due end of February for hiking policy rates, but is likely to start withdrawing liquidity through a 50-basis points CRR (cash reserve ratio) hike in the January 29th policy review."

Back pay of about 180 billion rupees ($3.96 billion) to federal government workers in October, the second instalment of a wage pact agreed in 2008, has also helped shore up consumers` purchasing power.

A private survey found last week the December purchasing managers` index showed the pace of manufacturing activity jumped to its highest since May on sharp rises in new work and output, while car sales in December rose an annual 40.3 percent.

Industrial output, which grew for the 11th consecutive month exceeded South Korea`s but lagged the figure for neighbouring China. Output in China grew 19.2 percent in November, while it rose 1.4 percent in South Korea.

The benchmark 10-year bond yield rose to 7.81 percent from 7.78 percent before the data, while the rupee pared some of its loss to be at 45.38/39 per dollar from 45.41/42 before the data.
Ending stimulus

Consumer durables goods output continued to surge, growing an annual 37.3 percent in November. Manufacturing production rose 12.7 percent on year, while mining output was up 10 percent and power generation rose 3.3 percent.

Analysts say the rising trend in India`s industrial output may lose momentum when the government begins to pull back fiscal and monetary stimulus starts this year and the low statistical base begins to fade from June.

"The headline IP (industrial production) number is much higher than expected, but it may be the last double-digit growth number for the current financial year," said ABN`s Kapur.

India`s economy grew an annual 7.9 percent in the quarter through September, its fastest in 18 months, prompting the finance minister to raise the growth forecast for the current fiscal year to end-March to around 8 percent from 7.0 percent.

However, a robust economic rebound and rising prices have put pressure on the RBI to tighten monetary policy.
India`s annual food price inflation rose 18.22 percent on supply shortages in the week to December 26. Broader annual wholesale price inflation is expected to have risen to 7.31 percent in December, higher than 4.78 percent in November, the median forecast in a poll of 22 economists showed.

The December data, which is due on Jan. 14, will be the last important data for the Reserve Bank of India (RBI) to gauge price pressures before its policy review on Jan. 29.

The RBI is widely expected to increase the cash reserve ratio, the level of deposits that banks must keep with it as cash, at its policy review. But economists are divided when it will start hiking rates.

Bureau Report

First Published: Tuesday, January 12, 2010 - 16:23

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