July 12 (Bloomberg) -- Indian industrial output rebounded in May from a contraction after the central bank cut interest rates earlier in the year to bolster a weakening economy.
Production at factories, utilities and mines rose 2.4 percent from a year earlier, after a revised 0.9 percent decline in April, the Central Statistical Office said in a statement in New Delhi today. The median of 35 estimates in a Bloomberg News survey was for a 1.8 percent climb.
Factory output has been subdued in India for most of this year as Europe’s debt crisis saps demand for Asian exports and price rises crimp spending at home. The Reserve Bank of India left borrowing costs unchanged in June after a cut in April, and has signaled inflation above 7.5 percent limits scope to join neighbors from China to South Korea in easing policy this month.
“Underlying growth momentum still remains weak and India may see a stagflationary state due to weak domestic demand and elevated inflationary pressures,” said Sonal Varma, economist at Nomura Holdings Inc. in Mumbai. “We don’t see scope for substantial rate reductions in the near term due to high inflation.”
The rupee has slumped about 20 percent against the dollar in the past 12 months as Indian economic expansion slowed to a nine-year low. The currency dropped 0.1 percent to 55.685 per dollar as of 12:15 p.m. in Mumbai. The BSE India Sensitive Index slipped 1.4 percent, while the yield on the 8.15 percent government bond due June 2022 declined to 8.12 percent from 8.14 percent yesterday.
Indian inflation probably climbed to 7.61 percent last month from 7.55 percent in May, according to the median estimate in a Bloomberg News survey ahead of a report on wholesale prices next week. That would be the fastest pace among the biggest emerging economies, stoked by costlier imports, climbing food prices and bottlenecks in the economy.
Today’s report showed mining fell 0.9 percent from a year earlier, while manufacturing grew 2.5 percent and electricity production rose 5.9 percent. Capital goods output declined 7.7 percent, falling for a third month.
“Even while the headline number was more than expected, the previous month’s decline and a drop in capital goods suggest sluggish demand,” said Varma.
Cooling growth, intensifying price pressures, fiscal and trade deficits and uncertainty over tax changes have added pressure on Prime Minister Manmohan Singh’s government to overhaul policies and support the expansion in Asia’s third-largest economy.
His efforts to open up the nation to more investment have been hampered by infighting in the ruling coalition and corruption scandals.
Some companies still see long-term potential in India. Swedish furniture retailer IKEA said last month it wants to open stores in the nation and may invest as much as 1.5 billion euros ($1.8 billion). Montek Singh Ahluwalia, deputy chairman of India’s planning commission, has said the nation remains capable of achieving as much as 8.5 percent annual growth.
Officials across the globe are stepping up efforts to protect their economies. The Bank of Korea, the People’s Bank of China, the European Central Bank and the Bank of England all eased monetary policy this month.
“India’s case is different -- with consumer-price inflation running over 10 percent, you can’t afford to ease rates,” said Arun Singh, Mumbai-based senior economist at Dun & Bradstreet Information Services India Pvt. “The answer to India’s growth slowdown lies in faster policy reforms.”
Reserve Bank Governor Duvvuri Subbarao next reviews borrowing costs on July 31. He cut the benchmark repurchase rate by 0.5 percentage point to 8 percent in April. Consumer prices climbed 10.36 percent in May from a year earlier.
Gross domestic product rose 5.3 percent in the three months through March from a year earlier, the weakest pace since 2003.
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