India's Industrial Output Surges In August

CommentsPosted: Tuesday 13/10/2009 12:51

While many developed economies are still struggling to find growth, some emerging economies are once more starting to fire up for real. Like India, where industrial production rose the most in 22 months in August, suggesting the central bank may have now have more scope to begin the exit process from emergency stimulus measures. Output at factories, utilities and mines was up 10.4 percent from a year earlier after gaining a revised 7.2 percent in July.

And the impovement in industrial production probably continued into September, since the HSBC Purchasing Managers Index increased for a sixth straight month. The index rose to 55 last month from 53.2 in August. India’s benchmark stock index has now more than doubled from the three-year low hit in March, capital inflows have rebounded and consumer demand has steadily recovered for consumer durables like cars, air conditioners, refrigerators as well as for homes.

The rise in output is good news for the Reserve Bank of India who can now turn their attentions more towards addressing the growing inflation problem. India’s wholesale prices rose for a fourth week at the end of September with the benchmark wholesale-price index climbing 0.7 percent (in the week to Sept. 26) from a year earlier, after rising 0.83 percent in the week to 19 September. Fears are also mounting that price gains will accelerate as the weakest monsoon rains since 1972 begins to create food shortages.

But the biigest problem is with consumer inflation. Prices for farm workers were up 12.89 percent in August from a year earlier. those for rural workers were up 12.67 percent and consumer prices paid by industrial workers climbed 11.72 percent.

The central bank cut interest rates six times between October 2008 and April this year, while the government reduced taxes on consumer products and imports, providing a combined stimulus worth more than 12 percent of India’s gross domestic product.

At its last meeting on July 28, the Reserve Bank held its reverse repurchase rate at 3.25 percent and maintained the repurchase rate at 4.75 percent. The cash reserve ratio was kept unchanged at 5.0 percent.

The consensus seems to be that the first rate hike will come in January but the possibility of a first move at the October 27 monetary policy meeting looks to be a much closer call than it seemed to be a month ago.

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MSV Staff - Stock Trader

India's Industrial Output Surges In August

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