India’s Output Surges, Policy Tightening More Likely


Senior Member
Feb 23, 2009
India’s Output Surges, Policy Tightening More Likely

Oct. 12 (Bloomberg) -- India’s industrial production rose the most in 22 months, suggesting the central bank may have scope to make an early exit from emergency stimulus measures.

Output at factories, utilities and mines jumped 10.4 percent in August from a year earlier after gaining a revised 7.2 percent in July, the statistics agency said in New Delhi today. Economists were expecting a 9.7 percent increase.

Manufacturing across Asia is showing signs of recovery, prompting policy makers to consider when they can begin to withdraw the monetary and fiscal stimulus initiated to protect their economies from the global recession. Central bank Governor Duvvuri Subbarao last week said India may need to act ahead of advanced economies due to “incipient” inflation pressures.

“With doubts over the durability of India’s upswing fading all the time, and inflation pressures already high, policy rates look certain to move up soon,” said Kevin Grice, an economist at Capital Economics Ltd. in London. “We still expect a first hike in January but the possibility of a first move at the Oct. 27 monetary policy meeting now looks close to a 50:50 call.”

Benchmark 10-year bonds declined, pushing yields to the highest in a month. The yield on the most-traded 6.90 percent note due 2019 added one basis point, or 0.01 percentage point, to 7.36 percent. The rupee was little changed, trading at 46.595 a dollar at 12:30 p.m.

Foreign Investors

India’s benchmark stock index has more than doubled from a three-year low in March as foreign inflows rebounded and demand improved for cars, air conditioners, refrigerators and homes.

The central bank cut interest rates six times between October and April and the government reduced taxes on consumer products and imports, together providing a stimulus worth more than 12 percent of India’s gross domestic product.

At its last meeting on July 28, the Reserve Bank held its reverse repurchase rate at 3.25 percent and maintained the repurchase rate at 4.75 percent. The cash reserve ratio was kept unchanged at 5.0 percent.

Manufacturing, accounting for about 80 percent of industrial output, rose 10.2 percent, compared with a 7.4 percent gain in July, today’s report showed. Mining increased 12.9 percent in August from 9 percent in the previous month and electricity gained 10.6 percent from year ago period.

Industrial production data show signs of economic recovery, Finance Minister Pranab Mukherjee told reporters in New Delhi today. Growth may accelerate in the second half of the fiscal year ending March, he said. The trend in factory output is likely to continue in September, Finance Secretary Ashok Chawla said separately.

‘Sure Signs’

India’s industrial production probably continued to improve last month. The Purchasing Managers’ Index compiled by HSBC Holdings Plc and Markit Economics increased for a sixth straight month in September, according to an Oct. 1 report. The gauge rose to 55 last month from 53.2 in August.

“There are sure signs of a durable manufacturing recovery,” said Sonal Varma, an economist at Nomura Securities Co. in Mumbai. “The downside is clearly behind us and we think India and China will lead the recovery in the Asia-Pacific.”

Factory output is improving across Asia as close to $1 trillion in government stimulus and record-low interest rates help the region lead the world economy out of the worst global recession since the 1930s.

China’s industrial production rose 12.3 percent in August from a year earlier, the most in 11 months. Malaysian output fell the least in 10 months.

Tax Revenue

Indian factory output may rise by more than 10 percent in the coming months as indicated by tax-collection figures and companies’ sales, according to Nomura’s Varma.

Reliance Industries Ltd., India’s most valuable company, paid 11.6 billion rupees ($249 million) in advance taxes in the quarter to Sept. 30, 69 percent more than the April-June period, the finance ministry said Sept. 22. State Bank of India paid 18.3 billion rupees and Oil & Natural Gas Corp. provided 17.96 billion rupees. Higher tax payments indicate rising sales.

Bajaj Auto Ltd., India’s second-largest motorcycle maker, sold 14 percent more vehicles in September from a year earlier and Tata Motors Ltd., India’s biggest maker, reported a 5.8 percent increase in sales in the month.

Policy makers will have to “strike a balance” in setting interest rates and shouldn’t compromise on growth in order to tame inflation, Finance Minister Mukherjee said Oct. 8.

India’s economic growth accelerated in the June quarter for the first time since 2007, with GDP increasing 6.1 percent from a year earlier. The central bank expects the $1.2 trillion economy to expand 6 percent in the year to March 2010, slower than the 8.7 percent average growth in the previous four years.

“Growth is recovering fast,” said Chetan Ahya, an economist at Morgan Stanley in Singapore. There’s “more than an even chance” the Reserve Bank in this month’s monetary policy statement will increase its cash reserve ratio by 50 basis points, he added.

India?s Output Surges, Policy Tightening More Likely (Update1) -

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