India's industrial output accelerated much faster than expected in July on surging capital goods production, strengthening the case for further monetary tightening by the central bank to tame near double-digit inflation. Industrial output rose 13.8 percent in July from a year earlier, nearly double analysts' forecast of a 7.7 percent rise and the fastest growth since April. It was also higher than June's downwardly revised 5.76 percent growth, government data showed on Friday.
Recent signs of cooling growth in Asia's third-largest economy, along with a sluggish global economic recovery, had tempered expectations for a rate increase at the central bank's policy review on September 16. India's financial markets were closed on Friday, but economists said the surprisingly strong industrial performance boosted the chances of a rate rise next week.
"The odds of a rate hike are rising again," he said. Frederic Neumann, co-head of Asian economics at HSBC put it more bluntly: "The message for policy-makers is clear: rates need to go higher. If not, price pressures will fail to recede." The deputy head of the Planning Commission, Montek Singh Ahluwalia, told reporters the July factory output data suggested India would probably meet or even exceed its growth estimate of 8.5 percent this fiscal year. With the growth target comfortably within reach, policymakers and investors are expected to focus on Tuesday's inflation data for cues on the central bank's next policy move.
Jackson expects the Reserve Bank of India to raise rates on Thursday. The central bank has raised its main lending rate by 100 basis points since mid-March to cool inflationary expectations and markets have been pricing in a further 50 basis points in policy rate increases this year.
August's headline inflation due next week is forecast to have eased to 9.6 percent, which would be its second-consecutive month below double digits. Yet with food inflation accelerating for three straight weeks and signs of manufacturing capacity constraints, policymakers fear high food prices could spill over into the broader economy.
Output of capital goods like construction and earth-moving equipment jumped an annual 63 percent in July, - a sign that companies were boosting investment in equipment as many factories were running at or close to capacity. Consumer durables production surged 22.1 percent and consumer goods output grew 6.7 percent.
Manufacturing output rose an annual 15.0 percent in July, the federal statistics office said in a statement. High prices have become a political headache for Prime Minister Manmohan Singh's government, sparking fears of a voter backlash against the ruling coalition in major state elections. Headline inflation has eased slightly but the last reading in July was still close to the double-digit mark at 9.97 percent.
India's manufacturing sector expanded last month at a slightly slower pace than in July as the growth in the pace of new orders cooled. The HSBC Markit Purchasing Managers' Index, based on surveys of 500 companies in India, eased to 57.25 in August from 57.6 in July. Industrial production growth for the month of April was revised to 15.22 percent from an already revised 16.5 percent.
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