New Delhi: India's annual industrial output rose more than expected in July, driven by capital goods production, which analysts said signaled continuing investment and underlying economic strength in the face of higher interest rates.
Friday's data showed industrial production rose 7.1 percent in July from a year earlier, beating a forecast of 6.5 percent in a Reuters poll and faster than 5.4 percent in June.
Industrial output is geared mostly to the domestic market, accounting for about a fifth of GDP, and economists were divided on whether it was strong enough to prompt another tightening by the Reserve Bank of India (RBI) at a rate review in October.
"Given the recent trend as far as manufacturing prices inflation is concerned there is still scope for RBI to go with that one last hike in October," says, head of Indian and ASEAN economics at Macquarie Capital Securities, Rajeev Malik.
The yield on the 10-year benchmark bond fell 2 basis points to 8.25 per cent after the data, with the market looking past the data to an auction later in day, while the rupee inched up to 45.7150/7250 per dollar and the main stock index trimmed losses.
The central bank raised interest rates three times in June and July as inflation moved into double digits, taking its main lending rate, the repo rate, to a seven-year high of 9.0 percent.
Annual inflation has moderated from a peak of 12.6 per cent in early August to just above 12 percent by the end of that month, and some economists say the central bank may not hike rates again.
"The headwinds to growth have risen and we expect average IIP growth of 6.7 per cent in fiscal 2008/09. We do not expect any more repo rate hikes by the Reserve Bank of India," says economist at Lehman Brothers, Sonal Varma.
Manufacturing output rose 7.5 per cent from a year earlier. Capital goods production jumped 21.9 per cent from a year earlier while consumer goods production rose 7.3 percent and consumer durables output was up 11.2 percent.