Indian GDP Growth Slows to 7.8%; Pressure for Interest Rate Rises Remains

India’s economy grew at the slowest pace in five quarters as manufacturing and services cooled, a moderation that has yet to curb pressure for more increases in interest rates to damp inflation.

Gross domestic product rose 7.8 percent in the three months ended March 31 from a year earlier, after a revised 8.3 percent gain in the previous quarter, the Central Statistical Office said in a statement in New Delhi today. That’s the slowest pace in five quarters. The median of 22 predictions in a Bloomberg News survey was for an 8.1 percent advance.

India’s inflation rate is the fastest after Russia among major emerging economies, and the Reserve Bank of India this month signaled further tightening as it raised rates for the ninth time since March 2010. The International Monetary Fund, Goldman Sachs Group Inc. and Credit Suisse Group AG project lower expansion in India this year.

“The central bank will need to slow growth further so that inflation can be brought under control,” said Shubhada Rao, chief economist at Mumbai-based Yes Bank Ltd. “The high level of inflation is the biggest risk to the economy.”

She expects the central bank to raise rates by half a percentage point by the end of September.

Stocks, Rupee

The Bombay Stock Exchange’s Sensitive Index rose 1.5 percent at the 3:30 p.m. close in Mumbai after paring gains to 0.5 percent immediately after the report. The rupee was little changed at 45.06 per dollar, easing from a high of 44.9675. The yield on the 7.8 percent note due April 2021 fell three basis points, or 0.03 percentage point, to 8.4 percent.

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 restraining 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.

Higher borrowing costs will slow India’s economic expansion and help ease inflation to 6 percent “with an upward bias” by March 31, 2012, Subbarao said this month. India’s economy may expand “around 8 percent” in the year through March, he said. It grew 8.5 percent in the previous 12 months.

Manufacturing Slows

Manufacturing rose 5.5 percent in the three months through March from a year earlier, compared with a 6 percent gain in the previous quarter, today’s report showed. Finance and insurance services grew 9 percent after a 10.8 percent jump in the previous quarter. Farm output rose 7.5 percent while mining advanced 1.7 percent, according to the report.

In China, the central bank has increased rates four times since mid-October. The Bank of Korea held off from boosting borrowing costs for two months after increases of a quarter point each in January and March.

Russia’s central bank yesterday unexpectedly lifted its overnight deposit rate while leaving the benchmark refinancing and repo rates unchanged as it sought to curb inflation without hurting growth. Consumer prices in the nation rose 9.6 percent in April.

“The RBI can’t afford to stop monetary tightening,” Dharmakirti Joshi, a Mumbai-based economist at Crisil Ltd., the local unit of Standard & Poor’s, said before the report. “Growth may slow but inflation pressures persist because of higher fuel prices.”

Fuel Prices

State-run refiner Indian Oil Corp., the nation’s largest, raised gasoline prices by 5 rupees (11 cents) a liter to 63.37 rupees in New Delhi on May 15, the biggest increase since June 2008, as crude prices surged.

Opposition parties including the Bharatiya Janata Party on May 16 organized protests in the country against the move. Prices gains threaten to erode purchasing power in a nation where the World Bank estimates almost three-quarters of the people live on less than $2 a day.

India may increase diesel prices when a panel of ministers meets on June 9, an official of the oil ministry said May 26, asking not to be identified before a public announcement.

“Surging rates and costlier fuel prices are a double whammy on our sales,” Ajay Seth, New Delhi-based chief financial officer at Maruti Suzuki India Ltd. (MSIL), the nation’s biggest carmaker, said before the report. “The silver lining is incomes are growing and that’s supporting demand.”

Consumer Demand

India’s economic expansion is still the quickest after China among major economies, bolstered by higher earnings among the nation’s 1.2 billion people.

Salaries in India in 2011 will likely rise the most in the Asia-Pacific region, a survey by Aon Hewitt LLC showed March 8. Government spending under the National Rural Employment Guarantee Act of 2005 has surged almost fourfold to 399 billion rupees, propping up demand in the countryside.

India was second after China in a ranking of 22 emerging Asian economies most likely to maintain steady and rapid growth over the next five years, according to the Bloomberg Economic Momentum Index for Developing Asia.

Still, consumer demand in India may wane under the impact of higher rates.

Sales at Maruti Suzuki rose 4.4 percent in April, the least in 28 months, the company said May 2. Home-sale registrations in Mumbai fell 30 percent in April from a year earlier, dropping to a 23-month low, according to a May 17 report by brokerage Prabhudas Lilladher Pvt.

Asia’s third-largest economy may grow 8.2 percent in 2011 from 10.4 percent in the prior 12 months, the IMF said April 28. Goldman Sachs cut its estimate for gross domestic product expansion in India to 7.8 percent from 8.7 percent for the fiscal year ending March 31, 2012, while Credit Suisse lowered it to 7.5 percent from 7.7 percent.

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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