India Industrial Output Rebounds, Giving Central Bank Scope to Hold Rates

India’s industrial production rebounded from the worst month since March 2009, a sign consumer demand is withstanding record interest-rate increases.

Output (INPIINDY) at factories, utilities and mines increased 5.9 percent in November from a year earlier after a revised 4.7 percent decline in the previous month, 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 2.1 percent gain.

Manufacturing in India and China improved in December, according to the Purchasing Managers’ Index, showing the world’s fastest-growing major economies have so far been resilient to Europe’s debt crisis. Today’s data gives scope for the Reserve Bank of India to keep borrowing costs unchanged on Jan. 24 for a second straight month to help fight inflation.

“There has been an upturn in consumer spending,” said Madan Sabnavis, chief economist at Mumbai-based ratings company Credit Analysis & Research Ltd. “The RBI will keep rates on hold until inflation is firmly down.”

Sabnavis expects the central bank to leave the repurchase rate at 8.5 percent this month.

India’s rupee has gained 2.9 percent against the U.S. dollar this year after being Asia’s worst-performing currency in 2011, helping cut import costs and ease inflationary pressures. The BSE India Sensitive Index has climbed 3.8 percent since Jan. 1 after losing a quarter of its value last year.

Bond Yields

The yield on the 8.79 percent bonds due November 2021 rose two basis points, or 0.02 percentage point, to 8.25 in Mumbai, according to the central bank’s trading system. The rupee advanced 0.6 percent to 51.5837 per dollar in Mumbai, according to data compiled by Bloomberg. The Sensitive Index (SENSEX) fell 0.9 percent.

Manufacturing gained 6.6 percent in November from a year earlier after a 5.7 percent drop in October, today’s report showed. Electricity output climbed 14.6 percent, while mining fell 4.4 percent.

India’s inflation rate exceeded 9 percent every month last year, reducing purchasing power in a nation where the World Bank estimates more than three-quarters of the people live on less than $2 a day.

The Reserve Bank raised its repurchase rate by 375 basis points since the start of 2010, the fastest round of increases since the central bank was established in 1935, according to data compiled by Bloomberg.

Slowing Inflation

India’s benchmark wholesale-price inflation probably eased to 7.40 percent in December from 9.11 percent in November, according to the median of 23 estimates in another Bloomberg News survey. India’s commerce ministry will unveil the data on Jan. 16.

Kaushik Basu, chief economic adviser in the finance ministry, said today that inflation in December may be less than 7.5 percent. The price gauge in January may fall to a little over 7 percent, he said.

The food-price index in India fell for a second straight week, declining 2.9 percent in the period ended Dec. 31 from a year earlier, the commerce ministry said in a statement today.

India’s inflation reading would still be higher than the levels in Brazil, Russia and China, which including India make up the so-called BRIC nations. Consumer prices rose 6.5 percent in Brazil, 6.1 percent in Russia and 4.1 percent in China last month.

“An inflation rate of more than 7 percent is a clear deterrent against any rapid change in the monetary policy stance in India,” Siddhartha Sanyal, chief India economist at Barclays Plc, said before the report. He expects the Reserve Bank to start reducing rates in the second quarter this year.

China’s Scope

China has scope to loosen fiscal and monetary policy, making it better placed than India to weather a global economic slowdown, Stephen Roach, non-executive chairman of Morgan Stanley Asia, said today.

China is bringing inflation under control and has a small budget deficit, Roach said in an interview with Bloomberg Television. In contrast, India has a currency under pressure, an “inflation problem” and a large fiscal shortfall, he said.

Higher borrowing costs in India are curbing demand in some industries such as automobiles.

India’s automakers group this week cut its estimate for annual local passenger-car sales, projecting deliveries may not grow for the first time in nine years.

Industrial output strengthened in November as cement production by companies including Ambuja Cements Ltd. increased 16.6 percent from a year earlier after stalling the previous month, according to commerce ministry data released last month. Steel production gained 5.1 percent.

The Purchasing Managers’ Index in India rose to 54.2 in December, the most in six months, HSBC Holdings Plc and Markit Economics said Jan. 2. In China, the index was at 50.3 from 49 in November, the Beijing-based logistics federation said Jan. 1.

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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