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Indian Industrial Output Grows Less Than Estimated as Interest Rates Climb

India’s industrial production rose less than expected following record interest-rate increases by the central bank and as the global recovery weakens.

Output at factories, utilities and mines increased 4.1 percent in August from a year earlier after a revised 3.8 percent gain in July, the Central Statistical Office said in a statement in New Delhi today. The median of 20 estimates in a Bloomberg News survey was for a 4.7 percent gain.

Emerging markets from Brazil to Indonesia have cut borrowing costs to shield expansion as Europe’s debt woes and a faltering U.S. recovery hurt the world economy. In India, the fastest inflation in more than a year is sustaining pressure for higher rates even as consumer demand wanes.

“The RBI won’t lower its guard just yet given the elevated level of inflation,” said Anubhuti Sahay, a Mumbai-based economist at Standard Chartered Plc. She expects the central bank to increase its repurchase rate by a quarter of a percentage point to 8.5 percent in the Oct. 25 policy decision.

The Indian rupee has weakened 8.9 percent against the dollar this year, the worst performer in Asia, threatening higher import costs.

The currency gained 0.6 percent to 49.03 at 2:48 p.m. in Mumbai today, while the Bombay Stock Exchange Sensitive Index rose 2 percent. The yield on the 7.8 percent note due April 2021 rose five basis points, or 0.05 percentage point, to 8.75 percent.

Inflation Estimate

India’s benchmark wholesale-price inflation rate was probably 9.75 percent in September, holding close to a 13-month high, the median of 20 estimates in a Bloomberg News survey showed. The commerce ministry will release the data on Oct. 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.

In his most recent policy decision on Sept. 16, Governor Duvvuri Subbarao raised the central bank’s repurchase rate by a quarter point to 8.25 percent. He said on Sept. 26 that inflation will slow by March 2012, “but more slowly than initially expected.”

The governor in July predicted inflation to ease to 7 percent by March 31. He forecast India’s economy to expand about 8 percent in the year through March from 8.5 percent in the previous year.

Rate Rises

Subbarao has boosted the Reserve Bank’s benchmark rate by 350 basis points since mid-March 2010, the fastest round of increases since the central bank was established in 1935, Bloomberg data show.

“We raise rates not because it is an end in itself but because inflation persists to be a problem,” Reserve Bank Deputy Governor Subir Gokarn said in a speech to students in the northern Indian town of Jaipur today. “To the extent we see the problem persisting, then that is the basis to raise rates. But if we see that the problem is starting to ease off, then that will provide the basis of a change.”

Manufacturing grew 4.5 percent in August from a year earlier compared with a 3.1 percent gain in July, today’s report showed. Mining fell 3.4 percent, while electricity output rose 9.5 percent.

Other indicators also show that the monetary tightening is curbing consumer demand.

Car Sales

Sales by companies including Maruti Suzuki India Ltd. (MSIL), the nation’s biggest carmaker, fell 1.8 percent in September, the third straight monthly decline, the Society of Indian Automobile Manufacturers said Oct. 10.

India’s manufacturing grew in September at the slowest pace in 2 1/2 years, according to the Purchasing Managers’ Index released by HSBC Holdings Plc and Markit Economics.

India’s merchandise export growth slowed for a second straight month in September, Commerce Secretary Rahul Khullar said in New Delhi today. Shipments rose 36.3 percent to $24.8 billion from a year earlier, Khullar said. Exports gained 44.3 percent in August.

“For the moment, the RBI will have to prioritize managing inflation over growth,” Ramya Suryanarayanan, an economist at DBS Group Holdings Ltd. in Singapore, said before the report. “Inflation is too high and is not going to ease to the central bank’s comfort zone anytime soon.”

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

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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