NEW DELHI, (Reuters) – India’s industrial production in July grew at its fastest annual pace in a decade, which analysts said could prompt the central bank to again raise interest rates over inflation concerns.
Boosted by healthy consumer spending on items such as cars and televisions, industrial output rose a higher-than-expected 12.4 percent from a year earlier as factories churned out goods to meet rising demand, data released on Tuesday showed.
Annual growth in India’s industrial production was last at these levels in May 1996, Reuters data shows.
The annual rise exceeded the median forecast in a Reuters survey for growth of 9.9 percent. Industrial output has been strong for several months with growth rates of a revised 9.0 percent in June, and 11.1 percent in May.
“Overall, industrial data buttress our view that there are enough domestic reasons for the Reserve Bank of India to continue tightening, Fed pause notwithstanding,” said A. Prasanna, an analyst at ICICI Securities in Mumbai.
But Finance Minister Palaniappan Chidambaram said he saw the numbers exerting no upward pressure on interest rates.
The central bank raised its benchmark short-term interest rate by 25 basis points to 6.0 percent on July 25, its second increase in six weeks, as it stepped up its fight against mounting price pressures in the fast-growing economy.
Federal bond yields rose after the data was released with the yield on the benchmark 10-year bond pushing up to 7.79 percent from 7.77 percent beforehand.
Some analysts said July’s strong momentum was partly due to last year’s low annual growth base of 4.7 percent. Output growth slowed in July 2005 due to floods in western states, the country’s most-heavily industrialized region, and a fire at a
key offshore oil rig.
Manufacturing, which represents more than three-quarters of industrial output, rose in July by 13.3 percent from a year earlier, accelerating from June’s 10.5 percent.
Output of consumer durables like refrigerators and televisions rose 17.5 percent in July from than a year earlier, while the production of capital goods, a key barometer of industrial activity, rose 15.4 percent.
A rise in export shipments to India’s key markets of the United States and European Union also helped industrial output, and analysts expect growth to be sustained in coming months.
But interest rates could be raised in the near-term as the strong momentum fuels expectations of higher inflation, they add.
Wholesale price inflation is presently at 5 percent, at the lower end of the central bank’s estimate of 5.0-5.5 percent for the year ending in March 2007.
“The industrial output figures indicate growth momentum remains strong in the manufacturing sector, particularly in capital goods. This is due to strong investment growth, which is reflected in credit growth too,” Shuchita Mehta, chief economist at Standard Chartered Bank based in Mumbai.
“The strong credit growth is likely to create buildup in inflationary pressures and prompt the central bank to raise rates by 25 basis points in its October policy review.”
Factory output has been on the rise since a bumper monsoon in 2003 boosted farm production and spurred spending in rural areas, where about two-thirds of India’s billion-plus population live.
Asia’s fourth-largest economy expanded 8.4 percent in the fiscal year which ended on March 31.