Manufacturing Grows for 24th Month in India, Increasing Pressure on Rates

By Kartik Goyal - Apr 1, 2011

India’s manufacturing grew for a 24th straight month, adding to the case for higher interest rates to curb price gains.

The Purchasing Managers’ Index was unchanged at 57.9 in March from February, when it accelerated at the fastest pace in three months, HSBC Holdings Plc and Markit Economics said in an e-mail today. A number above 50 indicates expansion.

The report shows that consumer demand in India remains strong, posing inflation risks even after the most aggressive rate increases among Asia’s major economies. India’s manufacturing inflation rate jumped 1.19 percentage points in February from January, the most in 10 months.

“The momentum in India’s manufacturing sector held up well in March, suggesting that growth is not an immediate concern,” Leif Eskesen, an economist at HSBC in Singapore, wrote in the report. “This calls for further tightening of monetary policy to tame inflation pressures.”

The Bombay Stock Exchange’s Sensitive Index fell 0.2 percent at 1:07 p.m. in Mumbai, while the yield on the 8.08 percent bond due in August 2022 was little changed at 8.08 percent.

Exports climbed 49.7 percent to $23.6 billion in February, the most in 11 months, the commerce ministry said in a report in New Delhi today. Imports gained 21.2 percent to $31.7 billion, narrowing the trade deficit to $8.1 billion.
Budget Support

Demand may find more support from Finance Minister Pranab Mukherjee’s budget for the fiscal year starting today that plans to spur spending and exempt incomes below 180,000 rupees ($4,036) from tax, higher than the previous threshold of 160,000 rupees.

Prime Minister Manmohan Singh’s coalition aims to put more money in the hands of voters to help them cope with rising prices and shore up support for five state elections in 2011.

Governor Duvvuri Subbarao on March 17 increased the central bank’s repurchase rate by a quarter-point to 6.75 percent after he raised the inflation forecast for the second time since late January. The benchmark wholesale-price inflation rate would reach 8 percent by March 31, 2011, compared with 7 percent estimated on Jan. 25, he said. The price-gauge was 8.31 percent in February.

India has raised rates eight times since the middle of March 2010, compared with three in China and four in South Korea. Indonesia lifted its reference rate in February for the first time this year after opting not to join counterparts in boosting rates in 2010.
Credit Growth

India’s banks are lending at a faster pace than the central bank’s target, reflecting the need for higher borrowing costs to curb consumer spending.

Commercial loans rose 23 percent from the previous year as of March 11, above the 20 percent rate prescribed by the Reserve Bank of India.

Car sales by companies including Maruti Suzuki India Ltd., the nation’s biggest carmaker, rose to a record for the second month in February, the Society of Indian Automobile Manufacturers said March 9.

India’s $1.3 trillion economy may expand by as much as 9.25 percent in the year starting April 1, the finance ministry forecast in February.

In China, manufacturing growth accelerated for the first time in four months, easing concern that monetary tightening may lead to a sharp slowdown in the world’s second-biggest economy.

The Purchasing Managers’ Index rose to 53.4 in March from 52.2 in February, the China Federation of Logistics and Purchasing said in a statement on its website today. A separate PMI released by HSBC Holdings also gained.

India faces additional risks to inflation from oil, Governor Subbarao said March 29.

India imports three-quarters of its energy needs and oil has surged 26 percent in the past 12 months, stoked by political turmoil in the Middle East and Libya that threatens supplies.

To contact the reporter on this story: Kartik Goyal in New Delhi at kgoyal@bloomberg.net.

To contact the editor responsible for this story: Stephanie Phang at sphang@bloomberg.net
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