India Output Rebounds as Higher Prices Curb Rate-Cut Case

India’s industrial production grew at the fastest pace in more than a year in October and consumer-price inflation accelerated last month, reinforcing the case for the central bank to hold off on an interest-rate cut next week.

Output at factories, utilities and mines climbed 8.2 percent from a year earlier after a revised 0.7 percent decline in September, the Central Statistical Office said in a statement in New Delhi today. The median of 34 estimates in a Bloomberg News survey was for a 5.1 percent gain. Consumer prices gained 9.9 percent in November from a year earlier, a report showed.

Prime Minister Manmohan Singh has opened the nation to more foreign investment in the past three months and stepped up efforts to pare a budget deficit to reinvigorate an economy beset by faltering domestic spending and exports. The government plans to announce measures to boost overseas sales this week after shipments fell for a seventh month in November, while the Reserve Bank of India has signaled it may reduce interest rates next quarter if inflation eases.

“These numbers give some confirmation to the government that this is the right way to go,” said Leif Eskesen, Singapore-based chief India and Southeast Asia economist for HSBC Holdings Plc. who previously worked for the International Monetary Fund. “The recipe for getting growth back up to speed in India is quite clear and there has to be traction on these structural reforms.”

Stocks Gain

The nation’s benchmark BSE India Sensitive Index of stocks fell 0.3 percent as of 2:06 p.m. in Mumbai. The rupee was little changed at 54.2840 a dollar. The yield on the 10-year government bond due June 2022 was little changed at 8.18 percent.

India’s factory output in October exceeded expectations and the central bank will be “more focused” on wholesale inflation data before deciding on interest rates, Chakravarthy Rangarajan, chief economic adviser to the prime minister, said in a Bloomberg TV India interview today. The consumer-price data means the central bank may not have “freedom” to ease policy, he said in a separate interview with CNBC-TV18.

Indian consumer prices rose at the fastest pace in three months in November as costs of sugar and vegetables increased, a report showed today. That makes it the fastest among 17 economies in the Asia-Pacific region tracked by Bloomberg. The separate benchmark wholesale-price inflation rate was 7.45 percent in October, exceeding price gains in the BRIC group of nations that also includes Brazil, Russia and China. A report Dec. 14 may show the gauge accelerated in November, according to a Bloomberg News survey.

Resisting Pressure

The central bank, due to review monetary policy next week, has refrained from adding to an April interest-rate cut, resisting calls from Finance Minister Palaniappan Chidambaram for lower borrowing costs amid elevated inflation.

“Given the industrial production print for October 2012 and the anticipated pickup in wholesale price inflation in November 2012, we expect the RBI to retain the repo rate in the upcoming mid-quarter policy review,” Aditi Nayar, senior economist at ICRA Ltd., said in a note today. “However, the RBI is likely to reduce the cash reserve ratio by 25 basis points to ensure credit flow to productive sectors.”

The Indian rupee is among Asia’s worst-performing currencies this year as slower global growth and a recession in Europe damp exports, while Singh’s push to lure more foreign investors has been hurt by the widest budget deficit in major emerging nations and months of policy gridlock earlier in the year.

Growth Slows

Gross domestic product in Asia’s third-largest economy expanded 5.3 percent in the three months ended Sept. 30 from a year earlier, slowing to match a three-year low. The trade deficit held near the widest in more than 18 years in November as exports fell, a report showed yesterday.

Local passenger car sales by companies such as Maruti Suzuki India Ltd. fell 8.3 percent in November from a year earlier, according to Society of Indian Automobile Manufacturers data. Foreign direct investment fell 60 percent in the five months through August compared with a year earlier.

To revive investor confidence and avert a credit-rating downgrade to junk status, Singh’s government in September unveiled curbs on fuel subsidies and said it would allow more investment from abroad in industries such as retail and aviation. Officials have also lowered a levy on overseas borrowing to spur capital inflows and aid the currency.

Rating Outlook

Standard and Poor’s and Fitch Ratings cut their outlooks on India’s credit rating, currently at the lowest investment-grade level, to negative earlier this year. S&P, which rates Indian debt BBB- with a negative outlook, said in a statement yesterday the country’s large fiscal deficits and debt and its lower middle-income economy are constraining ratings.

The expansion in industrial output is “encouraging” and the government hopes to push ahead with plans to allow more foreign investment in insurance and open up the pension sector, which are crucial to improving economic sentiment and growth, Chidambaram told reporters at a news conference today.

“We believe the Indian economy has bottomed and is beginning to strengthen,” Robert Prior-Wandesforde, an economist in Singapore at Credit Suisse Group AG, said in a research note today, citing declining market interest rates and the potential boost to exports from the weaker rupee. “We are hopeful that the government’s various reforms will provide a quick boost to business confidence, encouraging some capital investment that would otherwise not have happened.”

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