India Manufacturing Expands at Slowest Pace in Nine Months After Rate Rise

By Kartik Goyal - Jul 1, 2011

India’s manufacturing grew at the slowest pace in nine months after the central bank raised interest rates by the most in a decade to tame prices.

The Purchasing Managers’ Index fell to 55.3 in June from 57.5 in May, HSBC Holdings Plc and Markit Economics said in an e-mailed statement today. A number above 50 indicates expansion.

Factory output has weakened in India and China, the fastest-growing major economies, as policy makers tightened borrowing costs to curb price gains. India’s inflation may quicken after the government increased diesel prices last week, Goldman Sachs Group Inc. and Kotak Securities Ltd. said.

“India is not going to see any respite from inflationary pressures after the fuel price hike,” said Suvodeep Rakshit, an economist at Kotak Securities Ltd. in Mumbai. “The RBI will continue tightening despite signs of growth moderating.”

Rakshit expects the central bank to lift borrowing costs for the 11th time since the start of 2010 in the next monetary policy meeting on July 26.

The Bombay Stock Exchange’s Sensitive Index fell 0.2 percent at 11:50 a.m. in Mumbai, and the yield on the 7.8 percent bond due in April 2021 gained three basis points to 8.35 percent. The rupee strengthened 0.2 percent to 44.61 per dollar.

India’s key wholesale-price inflation accelerated to 9.06 percent in May from an 8.66 percent gain in April, according to the commerce ministry.
Diesel Costs

The government’s June 24 decision to increase diesel tariffs for the first time in a year will spur living costs, Goldman said June 27 as it raised India’s inflation forecast to 8.6 percent for the year ending March 31 from an earlier estimate of 8.1 percent.

Policy makers allowed state-run refiners including Indian Oil Corp. to increase diesel costs by 3 rupees (7 cents) a liter, kerosene by 2 rupees a liter and cooking gas by 50 rupees for every 14.2 kilogram bottle. The decision was aimed at reducing government subsidies and help limit losses at companies selling fuels below cost.

Opposition parties including the Bharatiya Janata Party organized protests in the country against the move. Inflation erodes purchasing power in a nation where the World Bank estimates almost three-quarters of the people live on less than $2 a day.
Rate Increase

The Reserve Bank has lifted its benchmark repurchase rate by 275 basis points since the start of 2010.

India’s economic expansion is finding support from exports, which rose 56.9 percent in May from a year earlier to $25.9 billion, according to a statement from the commerce ministry today. Imports rose 54.1 percent to $40.9 billion.

In China, policy makers on June 14 increased lenders’ reserve requirements to drain cash from the economy after consumer prices rose 5.5 percent in May, the biggest jump since 2008. China has so far boosted rates four times since September.

A Chinese manufacturing index fell to the lowest level since February 2009, signaling that the world’s second-biggest economy is cooling as export demand weakens and the government reins in credit to control inflation.

The Purchasing Managers’ Index was at 50.9 in June compared with 52 in May, the China Federation of Logistics and Purchasing said in an e-mailed statement today. A separate survey showed manufacturing output declined for the first time since July 2010, HSBC Holdings said today.

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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