Bloomberg News

India’s Economy Grows More Than Estimated Amid Rate Pressure

August 30, 2011

(Updates with stocks, bonds, rupee close in sixth paragraph.)

Aug. 30 (Bloomberg) -- India’s economy grew faster than estimated last quarter, maintaining pressure on the central bank to extend its record interest-rate increases even as the global recovery weakens.

Gross domestic product rose 7.7 percent in the three months ended June 30 from a year earlier, the Central Statistical Office said in New Delhi today. That compares with a 7.8 percent climb in the previous three months. The median of 26 predictions in a Bloomberg News survey was for a 7.6 percent gain.

India’s consumption has “remained strong” because of higher salaries and inflation may remain “stubborn” in the near term, the Reserve Bank of India said last week. By contrast, growth has cooled in Asian nations from Taiwan to South Korea and Malaysia as a faltering U.S. recovery and Europe’s debt crisis curbs demand for the region’s exports.

“This data reinforces our view that the RBI will remain in a tightening mode,” said Biswa Swarup Misra, Mumbai-based chief economist at the state-run Bank of India who worked at the central bank from 2002 to 2010. “Even though the global mayhem poses risks to growth, the RBI’s core concern right now would be to control inflation.”

He expects the Reserve Bank to raise its repurchase rate by a quarter of a percentage point to 8.25 percent in the Sept. 16 policy meeting.

Stocks Gain

The Bombay Stock Exchange Sensitive Index gained 1.6 percent at 3:30 p.m. close in Mumbai today, its biggest two-day advance since July 2009. The yield on the most-traded 7.8 percent government note due 2021 fell one basis point to 8.32 percent after climbing near a three-week high earlier. The rupee weakened 0.1 percent to 46.09 per dollar.

India’s benchmark wholesale-price inflation rate has stayed above 9 percent since the start of December and was 9.22 percent in July after the government allowed state-run companies such as Indian Oil Corp. to increase diesel costs.

Governor Duvvuri Subbarao in his most recent policy decision on July 26 raised the central bank’s repurchase rate by half a percentage point and predicted inflation by the end of March will be 7 percent, a percentage point higher than his previous guidance. He forecast India’s economy to expand about 8 percent in the year through March from 8.5 percent in the previous year.

Subbarao has boosted the Reserve Bank’s benchmark rate by 325 basis points since mid-March 2010, the fastest round of increases since the central bank was established in 1935, Bloomberg data show.

Global Weakness

Since the last policy announcement, some of the central bank’s comments have pointed to the impact of a weakening global economy.

International economic prospects appear more “pessimistic” now than a month earlier, Reserve Bank Deputy Governor Subir Gokarn said on Aug. 18. If global financial problems “amplify and slow down global growth markedly,” it would “impart a downward bias” to the growth projection, the central bank said in a report on Aug. 25.

Still, the “immediate challenge to sustaining growth” lies in taming inflation, the Reserve Bank report said. India’s policy stance will change when inflation is “less of a problem,” Gokarn said Aug. 25.

Salaries in the world’s second-most populous nation may grow this year by an average of 13 percent, the fastest in Asia, according to a March survey by Aon Hewitt LLC, stoking price gains. Wages rose 11.7 percent last year.

Services Surge

Services including hotels, banking and telecommunications, which account for 58 percent of India’s economy, grew 10 percent in the three months through June from a year earlier after an 8.7 percent gain in the previous quarter, according to today’s report.

Manufacturing expanded 7.2 percent, while mining output rose 1.8 percent, the report showed. Farm output rose 3.9 percent last quarter, slower than the 7.5 percent growth in the three months ended March 31.

In the U.S., growth has slowed since early 2010, when gross domestic product expanded at a 3.9 percent annual pace. GDP rose at a 1 percent rate in the second quarter of this year after a 0.4 percent pace from January through March, according to the Commerce Department.

The Federal Reserve pledged on Aug. 9 to keep its main interest rate at a record low near zero through at least mid-2013. In Europe, the European Central Bank is taking the lead in combating the sovereign debt crisis approaching its third year by buying Spanish and Italian bonds.

Behind China

India’s expansion is the fastest after China among major economies, Rajeev Malik, a senior economist at CLSA Asia Pacific Markets in Singapore, said before the report. China’s economy grew 9.5 percent last quarter.

“In a world desperately searching for growth, India’s relative resilience” can’t be ignored, Malik said.

As a result, foreign direct investment in India more than doubled to $13.4 billion in the three months through June, a quarterly record, the commerce ministry said Aug. 8.

BP Plc’s plan to buy a 30 percent stake in oil and gas blocks of Reliance Industries Ltd. will result in an investment of $7 billion, and Vedanta Resources Plc’s purchase of Cairn India Ltd. may bring in $8.7 billion, according to the ministry.

“India’s growth momentum is still quite strong,” Dharmakirti Joshi, a Mumbai-based economist at Crisil Ltd., the local unit of Standard & Poor’s, said before the report. “It will keep inflation high.”

--With assistance from Manish Modi in New Delhi. Editors: Cherian Thomas, Brendan Murray

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To contact the reporter on this story: Kartik Goyal at kgoyal@bloomberg.net

To contact the editor responsible for this story: Stephanie Phang at sphang@bloomberg.net


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