Tags: India | Growth | May | Exceed | Government | Forecast | Rate

India Growth May Exceed Government Forecast, Ushering Rate Rise

Tuesday, 30 November 2010 01:36 PM

India’s economy is likely to surpass the government’s 8.5 percent growth target for the fiscal year, forcing the central bank to resume interest-rate increases as domestic demand offsets risks from abroad.

Gross domestic product climbed 8.9 percent for a second straight quarter in July to September, a government report showed yesterday, with the gains propelled by the manufacturing and services industries. Kaushik Basu, chief economic adviser to the finance ministry, said after the data release that India could achieve a 9 percent growth rate sooner than expected.

India’s expansion bucked a growth slowdown in Asian neighbors from Thailand to Malaysia, where currency appreciation and risks to exports from Europe’s debt crisis and U.S. unemployment have clouded the outlook. Without higher borrowing costs, India risks reigniting inflation stoked by rising commodity prices, expanding credit and strengthening consumer demand for products such as Maruti Suzuki India Ltd.’s cars.

“There will be a strain on the infrastructure, which in turn will create more pressure on inflation,” said Sajjid Chinoy, a Mumbai-based economist with JPMorgan Chase & Co. He predicted that central bank Governor Duvvuri Subbarao will raise interest rates by a quarter of a percentage point in January.

Chinoy, who previously worked at the International Monetary Fund, said that India’s challenge will be to boost private investment and expand the nation’s capacity in industries such as power generation.

Irregular Roads

The finance ministry estimates that India produces about 10 percent less electricity than it needs, and roads, used to transport about 65 percent of the nation’s cargo, are plagued by single lanes and irregular surfaces.

The $1.3 trillion economy is likely to expand 8.5 percent in the fiscal year through March, the most in three years, Prime Minister Manmohan Singh said Nov. 20. Finance Minister Pranab Mukherjee said yesterday the pace may exceed that target, and Basu said growth in the second half of the financial year that ends March 31, 2011 will be better than the first half.

Rising car sales and expanding bank credit provide evidence of growing consumer demand in Asia’s third-biggest economy.

Maruti Suzuki, India’s biggest carmaker, Tata Motors Ltd. and others sold a record 182,992 cars in October, according to the Society of Indian Automobile Manufacturers. Loans given by lenders such as State Bank of India Ltd. and rivals rose 22 percent in the fortnight to Nov. 5 from a year earlier, the fastest pace since January 2009.

Stocks Rise

The Bombay Stock Exchange’s Sensitive Index, or Sensex, rose 0.6 percent yesterday in Mumbai trading.

India’s GDP gain last quarter compares with an expansion of 1.9 percent in the 16-nation Euro area and 2.5 percent in the U.S. In China, where growth cooled to 9.6 percent in the same period, the central bank has raised interest rates and bank reserve requirements in the past two months to slow inflation.

China’s yuan has gained 2.3 percent against the dollar this year, more than the Indian rupee’s 1.4 percent, which is also less than the Thai baht’s 10.2 percent increase and the Malaysian ringgit’s 8 percent jump. The smaller gain in India’s currency may have prevented a bigger moderation in the country’s inflation via lower import costs, compared with Thailand, where consumer-price gains slowed to 2.8 percent in October.

India’s wholesale-price inflation rate was 8.58 percent in October, compared with the “ideal” level of 4 percent to 5 percent, according to Finance Minister Mukherjee. Consumer prices are rising at a pace near 10 percent, the fastest in the Group of 20 nations after Argentina.

Rate Forecasts

The Reserve Bank of India may need to resume raising interest rates in the coming months after lifting borrowing costs six times this year. Ten of 15 economists surveyed by Bloomberg News yesterday expect the central bank to raise borrowing costs by the end of March, while the rest predict no change for the period.

“The pressure on inflation is still significantly high,” said Sailesh Jha, chief Asia strategist at Jefferies Singapore Ltd., who expects rate increases in December and January. “India’s trajectory of growth is likely to be in the range of 9 percent to 9.5 percent over the next several years, which means that the pressure on infrastructure will accelerate.”

Central bank Governor Subbarao on Nov. 2 raised the benchmark repurchase rate and the reverse repurchase rate by a quarter-point each to 6.25 percent and 5.25 percent, saying inflation continues to hold above the “comfort zone.”

Luring Capital

Economists including Anubhuti Sahay of Standard Chartered Bank said faster growth and a higher interest-rate differential may attract capital inflows that contribute to inflation.

The Reserve Bank of India’s benchmark repurchase rate is 6.25 percent. By comparison, the U.S. Federal Reserve’s target for overnight interbank loans is zero to 0.25 percent, where it has been since December 2008.

The rate differential between India and advanced countries spurred an unprecedented $10 billion inflow into rupee debt this year. Overseas funds also invested a record $28.5 billion in Indian stocks on prospects of faster economic expansion in the South Asian nation.

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India s economy is likely to surpass the government s 8.5 percent growth target for the fiscal year, forcing the central bank to resume interest-rate increases as domestic demand offsets risks from abroad.Gross domestic product climbed 8.9 percent for a second straight...
Tuesday, 30 November 2010 01:36 PM
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