Bloomberg News

India’s Manufacturing Expands at Slowest Pace in Four Months

June 01, 2011

(Updates with comment from economist in seventh paragraph.)

June 1 (Bloomberg) -- India’s manufacturing grew at the slowest pace in four months as inflation above 8 percent and nine interest-rate increases since mid-March 2010 crimped output.

The Purchasing Managers’ Index fell to 57.5 in May from 58 in April, HSBC Holdings Plc and Markit Economics said in an e- mail statement today. A number above 50 indicates expansion.

Rising borrowing costs may have begun to hurt demand, reflected in slowing sales at Maruti Suzuki India Ltd., the nation’s biggest carmaker, and Ashok Leyland Ltd. The $1.4 trillion economy grew 7.8 percent in the three months through March, the slowest pace in five quarters, a government report showed yesterday.

“Even though the economy is showing signs of moderation, inflation running above 8 percent is a key problem that won’t allow the Reserve Bank of India to let its guard down,” said Sonal Varma, a Mumbai-based economist at Nomura Holdings Inc.

She expects the central bank to raise interest rates by half a percentage point by the end of December. Reserve Bank Governor Duvvuri Subbarao increased the repurchase rate by half a percentage point to 7.25 percent on May 3, the biggest move since July 2008, and indicated he is ready to step up the battle against inflation even at the risk of sacrificing growth.

While inflation slowed to 8.66 percent in April from 9.02 percent in March, the central bank said the rate probably won’t decline much further until September.

Orders Ease

The yield on the 7.8 percent note due April 2021 fell four basis points to 8.37 percent as of 10:56 a.m. The Bombay Stock Exchange’s Sensitive Index rose 0.3 percent while the rupee strengthened 0.3 percent to 44.93 per dollar.

Factory output eased in May due to slower expansion in domestic and overseas orders, Leif Eskesen, Singapore-based chief economist at HSBC, said in today’s statement.

“While the momentum slowed a bit and is set to ease going ahead, growth will be strong enough keep inflation pressures simmering and the Reserve Bank of India in tightening mode,” Eskesen said.

Overseas sales from India rose 34.4 percent in April from a year earlier to $23.8 billion, the commerce ministry said today. Imports rose 14.1 percent to $32.8 billion. The trade deficit was $8.99 billion.

Growth in Asia’s third-biggest economy slowed last quarter as manufacturing grew 5.5 percent in the three months through March from a year earlier, the slowest pace in at least seven quarters, and investment growth eased to a 1 1/2-year low, according to a statistics office report yesterday.

Consumer demand is starting to wane due to higher interest rates. Sales at Maruti Suzuki rose 1.9 percent in May, the least in 29 months, the company said today. Ashok Leyland, India’s second-biggest commercial vehicle maker, said last month sales dropped 15 percent in April.

--With assistance from Manish Modi and Pradeep Kurup. Editors: Stephanie Phang, Brendan Murray

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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