India’s industrial output growth dipped in April, the latest sign that the rising cost of credit and inflation are slowing the economy, which may compel the Reserve Bank of India (RBI) to pull back from its aggressive monetary policy tightening.
Production at factories, mines and utilities grew an annual 6.3 percent, lower than an 8.83 percent annual rise in March. Friday’s data was the first of a new series with a different base year of 2004-05, new components and weightings.
Under the old series, annual industrial output growth in April was 4.4 percent compared with a median forecast for 5.5 percent in a Reuters poll.
The industrial output data is the latest in a series of macroeconomic indicators, pointing to a slowdown in Asia’s third largest economy, which grew at a surprisingly modest 7.8 percent in the three months through March, its slowest in five quarters.
“Under both the old and new series, output data shows a decline in manufacturing activity, as also signalled by weakness in recent prints of auto sales and production figures. Higher borrowing costs, tighter credit-vigilance and rising input prices are likely to hinder production activity going forward,” said Radhika Rao, an economist at Forecast PTE in Singapore.
“Overall, the RBI is unlikely to pull the plug on the rate-tightening agenda in reaction to sluggish factory outcomes, though the releases do lower the scope for aggressive rate hikes in the coming months.”
Most economists including Rao expect the central bank to raise its main policy rate by 25 basis points at its policy review next week, after it raised rates by a bigger-than-expected 50 basis points last month.
The yield on the most-traded 7.80 percent 2021 bond eased 1 basis point to 8.26 percent after the industrial output data release.
The 5-year overnight indexed swap rate fell 2 basis points 7.70 percent and the 1-year fell 4 basis points to 7.86 percent after the data.
Manufacturing, which contributes about 80 percent to overall industrial output, grew 6.9 percent in April, lower than the 10.4 percent annual growth a month earlier.
Mining output grew 2.2 percent from a year earlier, while production at utilities rose 6.4 percent.
Capital goods output grew an annual 14.5 percent in April, while consumer goods production rose 2.9 percent. Consumer durables goods like cars recorded an expansion of just 3.8 percent as higher credit costs and fuel prices crimped demand.
“This (IIP data) combined with the easing of PMI and a fall in the order books of several firms would compel the RBI to go back to its calibrated approach,” said Rupa Rege Nitsure, chief economist at Bank of Baroda in Mumbai.
Even as the economy cools, inflation remains elevated. The central bank’s nine rate hikes since March 2010 have failed to bring headline inflation, which was 8.66 percent in April, to the central bank’s comfort zone of 4-5 percent.
Although a sharper-than-expected slowdown in the economy has somewhat tempered expectations about the pace of rate tightening for the rest of 2011, many economists still expect the central bank to raise rate by at least another 50 basis points by end-December.
Manufacturers are feeling the pinch of tightening interest rates and higher prices. Car sales in May rose at their slowest pace in two years, and analysts predict further slowdown in the second-fastest growing vehicle market.
Recent PMI data show input prices outpacing output prices, suggesting manufacturers are struggling to pass on rising costs to consumers. Business confidence in May sunk to its lowest level since July 2010.
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