Global Economics

India Likely to Raise Rates After GDP Spike


According to Duvvuri Subbarao, governor of the central bank, India needs to exit some of the "unconventional" measures used to spur growth

By Cherian Thomas and Kartik Goyal (Bloomberg) — India's central bank may withdraw more stimulus measures by the end of the year after Asia's third-biggest economy grew at the fastest pace in six quarters. "The chances of a rate move before the end of December have risen," said Robert Prior-Wandesforde, senior Asia economist at HSBC Holdings (HBC) in Singapore. Economic growth of 7.9% last quarter was an "extraordinary" number that "will no doubt make the Reserve Bank of India sit up and take notice," he said. Governor Duvvuri Subbarao, concerned about inflation gaining traction, last week indicated that there was a need to exit some of the "unconventional" measures used to spur growth. Australia and Vietnam have already begun to tighten monetary policy as the Asia Pacific region leads the world out of the worst recession since the 1930s. India's $1.2 trillion economy may grow about 7% in the year to Mar. 31, Finance Minister Pranab Mukherjee said in New Delhi on Nov. 30 after the statistics bureau released gross domestic product figures for the quarter ended Sept 30. Last quarter's growth beat the estimates of all 22 economists in a Bloomberg survey. Subbarao in October predicted growth this fiscal year of 6% "with an upward bias." The benchmark Sensitive index gained 1.8% to 16,926.22 on Nov. 30 after the GDP report and the rupee increased 0.3% to 46.5157 per dollar. The yield on the benchmark 10-year government bond rose 7 basis points to 7.26%. Australia, Vietnam

India's one-year swap rate rose 1.5 basis points to 4.615% at 8:24 a.m. in Singapore, after an 8.5-basis-point increase on Nov. 30. In such contracts a fixed-rate payment is swapped for a floating one. Australia's central bank may increase its benchmark interest rate by a quarter point on Dec. 1 for a record third straight month as evidence mounts that the nation's economy is strengthening, economists said. Vietnam raised its key rate by one percentage point to 8% last week to curb inflation. Growth in India is benefiting from record-low interest rates, tax cuts, and higher government spending unveiled by policymakers since September 2008 to shield the economy from the global slump. The combined stimulus is worth more than 12% of GDP. While Subbarao started to withdraw monetary stimulus in October by ordering lenders to keep aside a greater proportion of deposits in government bonds, he has kept the benchmark reverse repurchase rate unchanged at 3.25% since April. Weak Monsoon

Inflation pressures are building as growth quickens and after the weakest monsoon rains since 1972 hurt farm output, pushing up food costs. The central bank forecasts inflation of 6.5% by Mar. 31 from 1.34% in October and 0.5% in September. Macquarie Group economist Rajeev Malik expects Subbarao to raise the cash reserve ratio, or the proportion of deposits lenders keep with the central bank as cash reserves, as early as this month before increasing interest rates. Mukherjee said last month he will take "corrective" steps and pull back fiscal stimulus once economic recovery takes hold. That stage may not have been reached, as the central bank deputy governor Subir Gokarn on Nov. 30 said the unexpected increase in India's economic growth may be on account of the government stimulus and that it's "premature" to say the economy can grow 7% in the current financial year. Montek Singh Ahluwalia, deputy chairman of India's Planning Commission, the government's economic advisory arm, said the growth numbers suggest that policies are working and that there is no need to change them at present. Inflation is not a "big problem" at the moment, he said on Nov. 30. Withdrawing Liquidity

"We are still about two quarters away from rate hikes per se but the central bank might start withdrawing liquidity through an increase in its regulatory reserve requirements," said Gaurav Kapur, an economist at ABN Amro Bank in Mumbai. "While there is some improvement in private consumption, investment activity still remains a laggard." Companies including JSW Steel, India's third-largest producer, said it is "not very clear" whether the economy would expand at the same pace in the current quarter. Growth in the construction and real estate business has been subdued since October, JSW's Chief Financial Officer Seshagiri Rao said on Nov. 30. Still, the economic expansion in India is the fastest after China among the world's biggest economies, attracting investments from French tire maker Michelin & Cie and South Korea's Samsung Electronics. China's economy grew 8.9% last quarter. Michelin said this month it plans to invest 40 billion rupees ($860 million) in a new factory in the southern Indian state of Tamil Nadu. Samsung on Nov. 17 inaugurated an air-conditioner manufacturing unit in India, its fifth such facility in the world. "The pace of recovery is stronger than expected," said Chetan Ahya, regional economist at Morgan Stanley (MS) in Singapore. "We maintain our view that the central bank will lift policy rates by 25 basis points in January 2010." To contact the reporter on this story: Cherian Thomas in New Delhi at Cthomas1@bloomberg.net. Last Updated: November 30, 2009 20:17 EST


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