Manufacturing Jump to Boost Prospects for January Rate Rise: India Credit

India’s industrial production is likely to expand at the fastest pace in three months, prompting JPMorgan Chase & Co. to predict the central bank may resume raising interest rates as early as next month to curb inflation.

Factory, utilities and mines output probably rose 8.4 percent in October from a year earlier after a 4.4 percent increase in September, according to the median estimate of 22 economists in a Bloomberg survey before a statistics office report tomorrow. This week Finance Minister Pranab Mukherjee raised the government’s economic growth forecast for the current fiscal year to 9.1 percent, the most in three years.

India’s economy may expand more than China’s in the next 10 years if the world’s second-most populous nation lifts curbs on foreign investment and boosts spending on roads and bridges, New York University Professor Nouriel Roubini, who predicted the global financial crisis, said last week. The rupee has advanced 1.7 percent this month, the best performance among Asia’s 10- most traded currencies, as the difference in yields between Indian debt due in a decade and 10-year Treasuries widened to 492 basis points, or 4.92 percentage point, from 374 on Jan. 1.

“Indian government bonds continue to remain attractive due to interest-rate differentials,” Sajjid Chinoy, a Mumbai-based economist with JPMorgan, said yesterday. “The rate pause is temporary and the RBI will start raising rates as early as the first quarter if inflation continues to remain sticky and above its comfort zone.”

The yield on the 10-year government bond has risen 14 basis points to 8.11 percent since Nov. 2, when the central bank raised rates for the sixth time this year. The RBI will meet to decide borrowing costs on Dec. 16 and Jan. 25.

Repurchase Rate

On Nov. 2 the Reserve Bank of India increased the benchmark repurchase rate by a quarter percentage point to 6.25 percent and the reverse-repurchase rate to 5.25 percent. Inflation continues to remain above the central bank’s “tolerance level,” Governor Duvvuri Subbarao said in Kolkata yesterday. The central bank said it may not raise borrowing costs for the next three months.

Ten of 15 economists surveyed by Bloomberg News expect the central bank to raise borrowing costs by the end of March, while the rest predict no change for the period. Three expect rate increases at the Jan. 25 meeting.

“Immediate future rate action is unlikely barring some shocks,” Subbarao said on Nov. 2. “The question is, what is the immediate future? I would believe it is three months.”

Higher output, as evidenced by record sales of Maruti Suzuki India Ltd. cars and more lending by State Bank of India Ltd., suggests strong domestic consumer demand. The nation’s service industry expanded at the quickest pace in four months in November, HSBC Holdings Plc and Markit Economics said Dec. 3. Exports in November jumped 26.8 percent to $18.9 billion.

‘Growth Momentum’

“The growth momentum in the industrial and consumption sectors continues to be strong and that may help achieve a higher growth,” Deepali Bhargava, a strategist at ING Groep NV in Mumbai, said yesterday. “Growth resurgence and underlying inflationary pressures will likely prompt the RBI to raise rates in the first quarter next year.”

Faster economic gains and wider interest-rate differentials have attracted $9.5 billion into rupee debt and $29.6 billion into stocks, resulting in the rupee appreciating by 3.3 percent this year to 45.06.

“Managing the risks around inflation, capital flows and fragile recovery in advanced economies will be the key near-term policy challenges,” Dharmakirti Joshi, a Mumbai-based economist at Crisil Ltd., the Indian unit of Standard & Poor’s, said yesterday.

Interest-Rate Swaps

Since the first rate increase this year on March 19, the spread between India’s debt due in a decade and 10-year Treasuries has widened 89 basis points to 489 yesterday. The gap, which has averaged 317 in the past decade, reached a 10- year high of 567 on Oct. 20.

The cost of fixing rupee borrowing costs for 12 months in the interest-rate swap market surged 1.89 percentage points this year to 6.95 percent, as investors increased bets Subbarao will raise rates, Bloomberg data show. The swap rate rose 13 basis points this month.

Prices of five-year credit-default swaps used to protect against losses on the debt of India’s largest lenders fell in the past three months, according to data provider CMA. Swap prices dropped 19 basis points for State Bank of India, the nation’s largest lender, and 34.5 basis points for ICICI Bank Ltd., the country’s second-biggest lender.

Growth Projections

Local-currency debt returned 4.1 percent in 2010, according to indexes compiled by HSBC Holdings Plc, as the Reserve Bank raised borrowing costs by 150 basis points. Investors in China earned 1 percent, the least in the region, the indexes show.

India’s $1.3 trillion economy expanded 8.9 percent for a second straight quarter in July to September. India’s finance ministry said on Dec. 7 the economy may expand as much as 9.1 percent compared with an earlier forecast of 8.25 to 8.75 percent.

“We are looking at revising our growth estimate upwards given the strong demand in the economy,” Rajeev Malik, an economist at CLSA Asia Pacific Markets said on Dec. 7. “We think the RBI will have to come back to raise rates in January to keep a lid on inflation fueled by faster growth and higher global commodity prices.”

Not Ideal

The consumer-price inflation rate is running close to 10 percent, the most among the G-20 countries after Argentina, according to data compiled by Bloomberg. The wholesale-price inflation rose 8.58 percent in October, which according to Finance Minister Mukherjee is double the ideal level of 4 percent to 5 percent.

ING raised its growth forecast for India to 8.7 percent from 8.4 percent after the Nov. 30 announcement. Goldman Sachs Group Inc. and Morgan Stanley said there’s a chance that growth may exceed their 8.5 percent forecasts.

“We are bullish on government bonds given the higher yield opportunity due to the higher rate differential,” Navneet Munot, who oversees $8.5 billion as chief investment officer at Mumbai-based SBI Funds Management Pvt., said yesterday. “The central bank will have to come back to consider rate increases early next year as higher commodity prices add to inflation.”