India Factory Output Unexpectedly Grows as Rajan Fights Slowdown

Indian industrial production unexpectedly rose in July, bolstering new central bank Governor Raghuram Rajan’s fight against a slumping rupee and slowing economic growth.

Production at factories and utilities climbed 2.6 percent from a year earlier after a revised 1.8 percent decline in June, the Central Statistical Office said in New Delhi yesterday. The median of 28 estimates in a Bloomberg News survey was for a 0.9 percent fall. Another report yesterday showed consumer prices rose 9.52 percent in August from a year earlier.

The rupee has performed worse than most Asian currencies this year as slowing growth and a record current-account deficit hurt confidence in the region’s No. 3 economy. Rajan, who reviews interest rates for the first time next week, is under pressure to support the currency and avoid a surge in import costs that would fuel price pressures.

“It’s a good number but nowhere does it indicate a strong revival in the weak growth story,” said Anubhuti Sahay, an economist at Standard Chartered Plc in Mumbai. The central bank will remain focused on containing the rupee volatility and hence will keep rates on hold in the next policy meet, she said.

The rupee weakened 0.3 percent to 63.535 per dollar in Mumbai yesterday. The S&P BSE Sensex index of stocks fell 1.1 percent. The yield on the benchmark 7.16 percent government bond due May 2023 jumped 4 basis points, or 0.04 percentage point, to 8.50 percent.

Growth Forecast

Manufacturing grew 3 percent in July from a year earlier, after a 1.7 percent decline in June, yesterday’s industrial output data showed. Mining shrank 2.3 percent, while electricity output gained 5.2 percent.

Concerns over inflation, the rupee’s fall and industrial output that dipped in May and June prompted Standard Chartered last month to cut India’s economic growth forecast to 4.7 percent from 5.5 percent in the fiscal year ending March 2014. CLSA Asia Pacific Markets now expects a 4.2 percent expansion, down from 5.2 percent, while DBS Bank sees 4.3 percent growth.

The central bank’s key goal is containing inflation expectations, Rajan told reporters on Sept. 4 when he took over as the Reserve Bank of India’s 23rd governor. India can fix its growth slowdown and financial woes with “modest reforms” and achieve economic growth of between 5 percent and 5.5 percent this year, Rajan said in a commentary published on Sept. 11.

“This is not to say that ambitious reform is not good, or is not warranted to sustain growth for the next decade,” Rajan wrote in Project Syndicate. “But India does not need to become a manufacturing giant overnight to fix its current problems.”

Record Low

India’s trade deficit narrowed in August as exports grew 13 percent in the month from a year ago, while imports fell 0.7 percent, the commerce ministry said Sept. 10.

The rupee sank to an all-time low 68.845 per dollar on Aug. 28, hurt by the possibility of reduced U.S. monetary stimulus and a current-account deficit that reached a record during the last fiscal year. It has pared some of those losses after Rajan announced concessional swaps for banks’ foreign-currency deposits, and U.S. jobs data prompted speculation the Federal Reserve may be less aggressive in cutting stimulus.

Wholesale-price inflation probably accelerated 5.70 percent in August, compared with 5.79 percent in July, according to the median estimate in another Bloomberg survey, before data due Sept. 16.

Raising Costs

Indian companies have been buffeted by climbing costs and faltering growth, forcing them to raise prices. JSW Steel Ltd., Jindal Steel & Power Ltd. and others said they will increase prices by as much as 7 percent this month as the rupee’s decline inflates costs of raw materials purchased overseas.

Rajan will make his interest rate decision on Sept. 20, two days after the U.S. Federal Reserve holds a meeting. He inherited an economy that expanded 4.4 percent last quarter from a year earlier, the weakest pace since 2009, as investment fell and consumer spending in the nation of 1.2 billion people moderated.

The central bank raised two interest rates in July to help stem the rupee’s slide against the dollar. Nations from Brazil to Indonesia have also boosted borrowing costs to aid currencies, as the prospect of reduced Federal Reserve monetary stimulus saps demand for assets in emerging markets.

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