Industrial Output Grows at Slowest Pace in Two Years After Rate Increases
Reserve Bank of India Governor Duvvuri Subbarao
Joshua Roberts/Bloomberg
Duvvuri Subbarao, governor of the Reserve Bank of India (RBI), second from right, has increased the central bank’s repurchase rate by 375 basis points since the start of 2010.
Duvvuri Subbarao, governor of the Reserve Bank of India (RBI), second from right, has increased the central bank’s repurchase rate by 375 basis points since the start of 2010. Photographer: Joshua Roberts/Bloomberg
India’s industrial production grew in September at the slowest pace in two years, hurt by record interest-rate increases and a faltering global recovery.
Output at factories, utilities and mines increased 1.9 percent from a year earlier after a revised 3.6 percent gain in August, the Central Statistical Office said in a statement in New Delhi today. The median of 27 estimates in a Bloomberg News survey was for a 3.5 percent gain.
The Reserve Bank of India last month signaled it’s nearing the end of monetary tightening after it raised rates for the 13th time since mid-March 2010 to damp inflation. Asian nations from Indonesia to South Korea are either cutting rates or keeping borrowing costs on hold to shield expansion as Europe’s debt crisis weakens the world economy.
“The economy is slowing at a faster pace amid high rates and risks from the global uncertainty,” said Indranil Sen Gupta, a Mumbai-based economist at Bank of America Merrill Lynch. “Interest rates have peaked.”
The BSE India Sensitive Index declined 1 percent at close in Mumbai. The yield on the 8.79 percent government security due November 2021 rose one basis point, or 0.01 percentage point, to 8.92 percent. The rupee was little changed at 50.15 per dollar. The currency has tumbled more than 10 percent this year.
Rupee’s Impact
The Reserve Bank said last month that the rupee’s weakness risks fueling inflation, which has stayed above 9 percent since the start of December.
The central bank said on Oct. 25 that its monetary tightening will help curb inflation and that the likelihood of a rate action in the December policy meeting is “relatively low.”
The Reserve Bank predicted India’s economy will expand 7.6 percent in the year ending March 31, lower than the 8 percent it estimated earlier. The central bank expects inflation to ease to 7 percent by March 31.
India’s benchmark wholesale-price inflation rate probably slowed to 9.64 percent in October from 9.72 percent in the previous month, the median of 12 estimates in a Bloomberg News survey showed. The commerce ministry will release the data on Nov. 14.
India’s food inflation rate was 11.81 percent in the week ended Oct. 29, compared with 12.21 percent in the previous week, the commerce ministry said in a statement today.
Food Inflation
Food inflation is “still in double digits and it’s not a healthy situation,” Reserve Bank Deputy Governor Subir Gokarn said at a conference in New Delhi today.
“One element we do influence is interest rate and if we do see inflation rates coming off as we expect, we could be looking at the peaking of the cycle,” Gokarn said. “But even while I can give that guidance, let me emphasize that it’s a guidance not a commitment. It’s based on a scenario materializing and there are many risks to that scenario materializing.”
Governor Duvvuri Subbarao has increased the central bank’s repurchase rate by 375 basis points since the start of 2010. That’s the fastest round of increases since the central bank was established in 1935, Bloomberg data show. The repurchase rate is 8.5 percent.
As a result, consumer demand is showing signs of waning.
Steel production by companies including Tata Steel Ltd. (TATA), India’s largest producer, grew 6.6 percent in September from a year earlier, compared with an 8 percent gain in August, the commerce ministry said Oct. 31. Cement production growth slowed to 0.9 percent from 7.2 percent during the period, the statement showed.
Slowing Exports
India’s merchandise exports grew 10.8 percent in October, the least in two years, as waning demand in Europe cut orders, Commerce Secretary Rahul Khullar told reporters in New Delhi on Nov. 8.
“There’s no question that we are concerned that the pace of growth in the economy has slowed down,” Montek Singh Ahluwalia, deputy chairman of India’s Planning Commission, told reporters in New Delhi today. “We have to make sure that next year the economy recovers from what is clearly a slower growth phase in the current year.”
Subbarao said last month that the central bank gave the guidance on rates to help boost investment.
India’s inflation will start to decline from December and ease to 7 percent by March before moderating further in the first half of the new fiscal year starting April 1, according to the central bank. Beyond December, “if the inflation trajectory conforms to projections, further rate hikes may not be warranted,” the Reserve Bank said Oct. 25.
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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