India's Industrial Production Expands 10.8%, Fastest Pace in Three Months

India’s industrial production grew at the fastest pace in three months, threatening to strain power and transportation capacities and stoke inflation. Stocks rose.

Output at factories, utilities and mines rose 10.8 percent in October from a year earlier after a 4.4 percent increase in September, the statistics office said in a statement in New Delhi today. The median estimate of 29 economists in a Bloomberg News survey was for an 8.5 percent gain.

Reserve Bank of India Governor Duvvuri Subbarao said this week that inflation remains above “tolerance level,” as the country battles rising prices along with China. India may raise interest rates in January after pausing at the next policy meeting on Dec. 16 because of a cash crunch at lenders, said economists at Kotak Mahindra Bank Ltd. and Nomura Holdings Inc.

“This kind of strong growth will accentuate the pressure on inflation and calls for further monetary tightening,” said Sonal Varma, a Mumbai-based economist at Nomura, Japan’s biggest brokerage. “We think the RBI is likely to raise rates in the January to March quarter.”

The Bombay Stock Exchange’s Sensitive Index rose for the first time in four days, climbing 1.4 percent. Ten-year government bond yields fell four basis points to 8.08 percent as of 5 p.m. in Mumbai. The rupee advanced 0.4 percent to 45.05 against the dollar.

Inflation Data

The central bank’s goal is to keep the benchmark wholesale- price inflation rate between 4 percent and 4.5 percent. It may slow to an 11-month low of 7.5 percent in November, according to the median of 26 estimates in a Bloomberg News survey. The commerce ministry is scheduled to announce the data on Dec. 14.

In China, where industrial output rose 13.1 percent in October from a year earlier, inflation is accelerating following an unprecedented credit expansion, a result of efforts to protect the economy from last year’s global recession. Consumer prices rose 4.4 percent in October from a year earlier, the fastest pace in two years.

The People’s Bank of China today raised lenders’ reserve requirements for the third time in five weeks. In October, it increased the interest rate for the first time since 2007.

The Reserve Bank, which has boosted rates six times in 2010, the most by any central bank in Asia, said Nov. 2 that it probably won’t raise rates until January, giving itself time to see the impact of its monetary tightening. India’s benchmark repurchase rate is 6.25 percent.

Manufacturing Surge

Manufacturing grew 11.3 percent in October after a 4.6 percent gain in September, today’s report showed. Electricity production climbed 8.8 percent while mining rose 6.5 percent.

A cash squeeze at banks after companies including Coal India Ltd. raised funds from share sales and businesses withdrew money to pay taxes may also prompt Subbarao to keep borrowing costs unchanged for now, according to Anubhuti Sahay, an economist at Standard Chartered Plc in Mumbai. Coal India raised 152 billion rupees ($3.4 billion) in October in the nation’s biggest initial share sale.

Commercial banks borrowed an average 809 billion rupees a day this quarter using the RBI’s repurchase-auction window, compared with 239 billion rupees in the previous three months, according to data compiled by Bloomberg, indicating a shortage of funds at lenders.

Subbarao said yesterday that the central bank was “deeply conscious” of the liquidity situation at banks, and that it “will take some steps as may be necessary.”

Bond Auction

The RBI yesterday conducted an auction to purchase 120 billion rupees of securities to ease liquidity. Deputy Governor Subir Gokarn told reporters in Kolkata this week that the move to replenish funds in the banking system isn’t a sign of a change in the central bank’s monetary policy stance.

“Inflation will remain a problem for a long while,” D. H. Pai Panandiker, president of the RPG Foundation, an economic policy group in New Delhi, said before the production data. “When consumer demand rises amid infrastructure constraints, it pushes up the cost of doing business.”

India has a power deficit of 10.5 percent during peak hours, the nation’s Central Electricity Authority estimates, forcing most companies to invest in their own supply back-ups. The target to add 62,000 megawatts of generation capacity in the five years to March 2012 may be missed by about 4,000 megawatts, the government said yesterday.

The average turnaround time for ships unloading and loading cargo at India’s major ports is almost four days, compared with 10 hours in Hong Kong, India’s finance ministry estimates.

“There is a real risk of inflation accelerating in the coming months due to strong growth,” said Dharmakirti Joshi, a Mumbai-based economist at Crisil Ltd., the local unit of Standard & Poor’s Ratings Services. “The RBI may consider raising rates in January.”

Foreign manufacturers, meanwhile, are investing more in India to benefit from growing demand in the nation of 1.2 billion people, the most populous after China.

Daimler AG this week announced plans to invest as much as 3.5 billion rupees by 2012 to expand its India factory that builds Mercedes-Benz cars.