Bloomberg News

India’s Industrial Output Grows at Slowest Pace in 21 Months

September 12, 2011

(Updates with finance ministry comment in ninth paragraph.)

Sept. 12 (Bloomberg) -- India’s industrial production grew in July at the slowest pace in almost two years as consumer demand moderated after record interest-rate increases. The rupee fell to the lowest level in more than a year.

Output at factories, utilities and mines rose 3.3 percent from a year earlier, following an 8.8 percent gain in June, the Central Statistical Office said in a statement in New Delhi today. The median of 26 estimates in a Bloomberg News survey was for a 6.2 percent advance.

Reserve Bank of India Governor Duvvuri Subbarao has to weigh the risks to expansion posed by Europe’s debt crisis and a faltering U.S. recovery against inflation when he makes his next policy decision on Sept. 16. Asian central banks from South Korea to Malaysia kept borrowing costs unchanged last week as they assess the global economy.

“It’s going to be a difficult decision this time,” said Shubhada Rao, chief economist at Mumbai-based Yes Bank Ltd. “The RBI’s policy is taking shape in terms of moderating growth, but it will raise rates one more time as inflation is still way above its comfort zone.”

Rao expects India’s central bank to increase its benchmark repurchase rate by a quarter of a percentage point to 8.25 percent this week.

Rupee Weakens

India’s rupee dropped 1.1 percent to 47.0650 per dollar at 2:30 p.m. in Mumbai. It earlier touched 47.1175, the weakest level since July 22, 2010. The Bombay Stock Exchange Sensitive Index tumbled 2 percent. The yield on the 7.8 percent bonds due April 2021 fell 2 basis points, or 0.02 percentage point, to 8.29 percent.

India’s benchmark wholesale-price inflation probably accelerated to 9.64 percent in August from 9.22 percent in July, according to the median of 23 estimates in a Bloomberg News survey. The commerce ministry will release the data on Sept. 14.

Inflation is a political issue in India as it erodes spending power in a nation where the World Bank estimates more than three-quarters of the population live on less than $2 a day.

“We are balancing between two very difficult problems -- one is inflation, which is persisting at close to 10 percent, and there is growth which is slowing down,” Kaushik Basu, the chief economic adviser in the finance ministry, told reporters in New Delhi today. “The RBI will have to balance these out and take a decision on this.”

‘Very Difficult’

Basu expects India’s inflation rate to be “close to 10 percent” in August and “remain very difficult” until December.

In his most recent policy decision on July 26, Subbarao raised the central bank’s repurchase rate by half a percentage point to 8 percent 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.

That’s curbing consumer demand. Sales at carmakers including Maruti Suzuki India Ltd. declined in August from a year earlier, the second monthly fall in a row.

Home Sales

Home sales in Mumbai, India’s financial capital, dropped the most in at least two years in July, with registrations declining 31 percent from a year earlier, according to brokerage Prabhudas Lilladher Pvt.

Manufacturing grew 2.3 percent in July from a year earlier after a 10.3 percent gain in June, today’s report showed. Mining output gained 2.8 percent and electricity climbed 13.1 percent.

The deceleration in India’s industrial production “to a large extent” is because of “the volatile capital goods segment,” Leif Eskesen, a Singapore-based economist at HSBC Holdings Plc, said in a note today. Output of capital goods such as plant and machinery fell 15.2 percent in July from a year earlier, after gaining 38.2 percent in June.

The Reserve Bank is watching for signs of any slowdown in domestic demand as it seeks to tame “inflation drivers” that are “very much in play,” Deputy Governor Subir Gokarn said Aug. 23.

Gokarn said the “question is whether what’s happening globally is going to impact commodity prices significantly or not” because ultimately, that is going “to determine how domestic inflation plays out.”

--With assistance from Manish Modi and Tushar Dhara in New Delhi. Editors: Cherian Thomas, Sunil Jagtiani

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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