India output growth slows to 11.5%, rate pressure stays

Updated: 2010-07-13 10

By Kartik Goyal (China Daily)

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NEW DELHI - India's industrial production expanded less than analysts estimated, complicating the central bank's efforts to raise borrowing costs to curb inflation.

Stocks pared gains, the rupee weakened and bonds advanced after output at factories, utilities and mines rose 11.5 percent in May from a year earlier, slower than the 16.2 percent median forecast of 23 economists in a Bloomberg News survey. Production jumped a revised 16.5 percent in April, the statistics office said in New Delhi.

Reserve Bank of India Governor Duvvuri Subbarao faces the challenge of supporting growth while containing inflation, which may have stayed above 10 percent for a second straight month in June. He may boost rates by a quarter-point at the bank's July 27 meeting for the fourth time since mid-March in a bid to slow Asia's fastest inflation, said Shubhada Rao, an economist at Yes Bank Ltd.

"For the Reserve Bank of India, the main focus remains on the inflation outlook," said Brian Jackson, an emerging-markets strategist at Royal Bank of Canada in Hong Kong. "The wholesale-price data later this week will play a bigger role in deciding whether we see another rate hike at the next meeting."

India's 10-year bonds gained, pushing yields down by five basis points to 7.60 percent as of 1 pm in Mumbai. The Bombay Stock Exchange's Sensitive Index rose 0.4 percent while the rupee fell 0.2 percent to 46.75 against the dollar.

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India's benchmark wholesale-price inflation rate may rise to 10.8 percent in June from 10.2 percent in May, according to the median forecast in a Bloomberg survey. The government is due to unveil the inflation data on July 14.

Consumer prices paid by industrial and farm workers in India are increasing at a pace of almost 14 percent, the most among 17 countries tracked by Bloomberg, including China and South Korea, on demand for motorcycles, houses and phones.

"We don't need to be alarmed by this production number as demand remains pretty strong," said Rao at Yes Bank. "The central bank is unlikely to look at this number as a concern and will continue to focus on inflation, which will hold the key for monetary policy action."

Wireless telecommunication companies including Bharti Airtel Ltd added 16.3 million customers in May, about 3 percent more than the previous month.

Cement companies such as ACC Ltd, India's biggest, sold about a tenth more in June from a year earlier, while sales at motorcycle maker, Hero Honda Motors Ltd, rose 16.6 percent.

The demand is prompting companies to expand their production capacities. ACC said in May it plans to spend 15 billion rupees ($321 million) to set up a factory of 3 million metric tons. Hero Honda plans to build a fourth factory to add to its 5 million-unit output capability.

Bloomberg News


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