India's March industrial output growth smashes forecast

(Reuters) - India’s industrial output growth in March beat forecasts on the back of a revival in capital goods production, allaying fears of a slowdown in the economy that will allow the Reserve Bank of India (RBI) to continue with rate hikes to control stubbornly high inflation.

The annual 7.3 percent growth in production at factories, mines and utilities compares with the median forecast for a 3.8 percent rise in a Reuters’ poll.

March’s output growth was sharply higher than an upwardly revised 3.65 percent annual growth a month ago.

“The IIP (industrial output) numbers are very healthy and encouraging and prove the underlying strength of the growth momentum. This will improve the RBI’s focus on inflation control,” said Rupa Rege Nitsure, chief economist at Bank of Baroda in Mumbai.

Most economists expect the central bank to raise its main operating policy rate by 25 basis points at its policy review in June, after it raised its key rates by a bigger-than-expected 50 basis points last week.

The benchmark 7.80 percent 2021 bond yield rose 2 basis points to 8.27 percent after the data. The BSE Sensex was up 0.1 percent briefly after being down 0.4 percent before the data.

The 5-year and 1-year overnight indexed swap rates rose 2 basis points each to 8.33 percent and 8.11 percent, respectively, after the data.

Capital goods output recovered in March, after contracting for three straight months, rising an annual 12.9 percent.

Manufacturing , which contributes about 80 percent to the overall output, grew 7.9 percent in March, sharply higher than 3.6 percent annual growth a month ago.

GROWTH ON TRACK?

However, some analysts are cautioning against reading too much into Thursday’s data for any trend on economic growth.

“Unless we get another month of similar strong data we can’t say that the trend has reversed. While data is obviously positive, growth is estimated to be at a lower level,” R.V.S. Sridhar, president and head of markets of treasury, Axis Bank in Mumbai.

“So, this does not bring out any fresh expectation --positive or negative -- in terms of growth.”

The RBI has raised its policy rate by a total of 250 basis points in nine moves since March 2010 as part of its anti-inflationary stance and analysts expect the rate to go up by another 75 basis points by December this year.

Rising borrowing costs and higher input prices moderated growth in consumer goods production to 7.77 percent in March from 11.04 percent in February.

Car sales in India rose at their slowest pace in nearly two years, rising 13.2 percent from a year earlier in April, as higher interest rates, fuel prices and vehicle costs crimped demand in the world’s second-fastest growing auto market.

“We have seen project investments slowing down and perhaps higher interest rates have now started impacting the consumption demand,” said Nitesh Ranjan, economist at Union Bank of India.

RISKS

India’s domestically driven economy is expected to have grown 8.6 percent in the fiscal year that ended on March 31, and the central bank has forecast growth to moderate to about 8 percent in the current fiscal year.

The government has not yet officially revised down its growth forecast of around 9 percent for this fiscal year, but Finance Minister Pranab Mukherjee said on Wednesday that the economy might grow slower than that due to volatile global commodity prices.

Oil prices rose to 32-month peaks in April due to tensions in the Middle East and North Africa, but a combination of a stronger dollar and signs of cooling in China has brought down prices.

Higher oil prices are not only threatening to slow down the economy, they are posing inflationary risks. Headline inflation surged to nearly 9 percent in March, well above forecasts, with the RBI forecasting it to remain around that level in the April-September period.

While food inflation slowed down to 7.70 percent in the last week of April, non-food manufacturing inflation -- a proxy for demand driven inflation -- shot up to a 29-month high of about 7.1 percent in March.

The HSBC Markit Purchasing Managers’ Index for April showed soaring fuel and raw material prices were driving up costs and feeding into output prices, a clear indication that high inflation was here to stay.