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Oct 12, 2009 at 08:50pm IST

Industry expands at fastest pace in 22 months

New Delhi: The country’s industrial output grew at its fastest pace in 22 months in August as factories cranked out more big-ticket household goods and cars as stimulus spending drove demand, but economists said the Reserve Bank of India was unlikely to lift interest rates at its review later this month.

Industrial output rose 10.4 percent in August from a year earlier, beating the median forecast in a Reuters poll, and July's annual growth was revised up to 7.2 percent from 6.8 percent, data showed on Monday.

Economists said while the data reinforced expectations for rising inflation, the RBI was unlikely to raise interest rates at an October 27 policy review as it would want more evidence of a sustained economic upturn.

INDUSTRY ON OVERDRIVE: Industrial output rose 10.4 percent in August from a year earlier.

"I think it gives leverage to RBI to completely concentrate on inflation," said N R Bhanumurthy, professor at the National Institute of Public Finance and Policy in New Delhi, who expects tightening in monetary policy by March.

"RBI would like to wait for the IIP (index of industrial production) and inflation numbers for the next month," he said.

Consumer durable goods output surged by an annual 22.3 percent as stimulus measures helped fuel demand, although Ramya Suryanarayan, an economist at DBS in Singapore, said the growth was driven by pent-up demand and pre-holiday season spending that was unlikely to be sustained.

"Inflation is rising, production is rising fast, so logically the data does suggest that it makes sense to move, but the central bank will probably wait it out at this meeting," said Suryanarayan, who expects the first rate hike by January at the earliest.

Manufacturing production in Asia's third-largest economy rose 10.2 percent in August from a year earlier, while mining output was up 12.9 percent and power generation rose 10.6 percent.

India's industrial output growth, which expanded for the eighth consecutive month, was the fastest since October 2007 but still lagged China's 12.3 percent growth in August, the quickest pace there in 12 months.

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The September purchasing managers' index showed the pace of manufacturing activity picked up as domestic demand and factory orders rose.

Offsetting drought

Faster output at factories, mines and utilities has helped offset a decline in farm output after the worst dry spell in nearly four decades and floods in different parts of the country hurt crops and pushed up food prices.

And despite looming inflation that some economists say could reach 8 percent by the end of March, India is fearful of raising rates before growth is more firmly entrenched.

Economists think the first policy shift could be an increase in the cash reserve ratio for banks in the December quarter.

On Friday, Prime Minister Manmohan Singh said the economy could still grow between 6.3 and 6.5 percent in 2009/10 (April-March), compared with 6.7 percent last year and 9 percent or more in each of the previous three years.

He also said the country still had to wait before unwinding stimulus efforts as the economy was not operating at full capacity, and said the inflationary impact of India's stimulus measures was likely to be minimal.

Early last week, Reserve Bank of India Governor Duvvuri Subbarao said India needs to tighten its monetary stance, but warned of the risks of mistiming such a move.

Analysts say festivals and lump-sum payouts of a backdated wage increase for government staff would keep consumer demand and output growth robust in the December quarter.

The RBI cut its main lending rate by 425 basis points between October and April as the global downturn hit the economy harder than expected. It also slashed banks' reserve requirements and pumped liquidity into markets.

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