India's Industrial Output Growth Unexpectedly Slows to Least in 16 Months

India’s industrial production growth unexpectedly slowed to a 16-month low in September, signaling consumer demand is waning after Asia’s fastest round of monetary policy tightening this year. Stocks and bond yields fell.

Output at factories, utilities and mines rose 4.4 percent after a revised 6.9 percent increase in August, the statistics office said in a statement in New Delhi today. The median estimate of 27 economists in a Bloomberg News survey was for a 6.4 percent gain.

Consumption may find support from the Indian central bank’s statement on Nov. 2 that it may refrain from raising interest rates in the next three months after boosting them six times in 2010. Part of the reason for the pause is to reduce the risk of an inflation-stoking capital influx from the U.S. and Japan, countries that are injecting additional monetary stimulus.

“This data strengthens our view that the central bank may hold rates at current levels in the near future,” said Sujan Hajra, chief economist at Anand Rathi Financial Services Ltd. in Mumbai. “It may assess the impact of previous rate hikes on growth and inflation, and keep an eye on capital inflows.”

The Bombay Stock Exchange’s Sensitive Index extended declines, falling 0.8 percent to 20,423.28 as of 12 p.m. in Mumbai. The yield on the 12-year government bond slid two basis points from the day’s high of 8.07 percent, while the rupee declined 0.8 percent to 44.64 against the dollar.

Manufacturing Growth

Industrial production was dragged lower by manufacturing, which grew 4.5 percent in September after gaining 7.5 percent in August, today’s report showed. Mining output rose 5.3 percent, while electricity production expanded 1.7 percent. Production of capital goods such as turbines and machinery fell 4.2 percent, according to the report.

Reserve Bank of India Governor Duvvuri Subbarao has room to pause the rate-increase cycle as manufacturing inflation slowed to a nine-month low of 4.59 percent in September.

The benchmark wholesale-price inflation rate may have dropped to 8.5 percent in October from 8.62 percent in the previous month, the median forecast of 21 economists in a Bloomberg News survey showed. The commerce ministry will announce the inflation data on Nov. 15 in New Delhi.

Rate Differential

The Reserve Bank’s benchmark repurchase rate is 6.25 percent. By comparison, the U.S. Federal Reserve’s target for overnight interbank loans is zero to 0.25 percent, where it has been since December 2008. The Fed Nov. 3 left unchanged its pledge to keep rates low for an “extended period” and said it will buy an additional $600 billion of Treasuries through June.

The Bank of Japan last month unveiled a 5 trillion-yen ($61 billion) fund that will buy government and corporate debt, as well as invest in real-estate investment trusts and exchange- traded funds to spur growth.

In China, where industrial output grew 13.1 percent last month, officials are grappling with inflows of money from bets on yuan gains and a surging trade surplus. Consumer prices rose 4.4 percent in October in China, the most in two years, building the case for the central bank to add to last month’s rate increase.

The interest-rate differential between India and the advanced countries spurred an unprecedented $10 billion inflow into rupee debt this year, strengthening the currency by 5.2 percent to 44.3 against the dollar since Sept. 1. Overseas funds also invested a record $28 billion into Indian stocks on prospects of faster economic expansion in the South Asian nation, driving the stock index to near a record.

The Sensitive Index has gained almost 20 percent since Jan. 1, making it the best performer among the world’s 10 biggest stock markets.

Consumer Demand

Industrial output may benefit through the rest of the year from consumers buying cars and new housing.

Companies including the local unit of Ford Motor Co. and Maruti Suzuki India Ltd. sold a record 182,992 cars in October, up 38 percent from the same month a year earlier, the Society of Indian Automobile Manufacturers said Nov. 10.

Cement production by companies such as Ambuja Cements Ltd., a subsidiary of Holcim Ltd., the world’s second-largest maker of the building material, rose 5.2 percent in September from a year earlier after a 1.6 percent gain in August, according to government data.

“There is no compelling evidence to suggest that industrial production is capitulating in a big way,” said Vishnu Varathan, an economist at Capital Economics Ltd. in Singapore. “There is no reason to be overly pessimistic.”