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Strong GDP growth adds to rate uncertainty

Strength in manufacturing and services drove faster-than-expected Indian economic growth in the first quarter.

india Updated: Sep 29, 2006 17:28 IST

Strength in manufacturing and services drove faster-than-expected Indian economic growth in the April-June quarter, but analysts remained split on whether the central bank needs to raise interest rates next month.

Asia's fourth-largest economy grew at an annual rate of 8.9 percent in the first quarter of the 2006/07 financial year, slower than the January-March rate of 9.3 percent but above analysts' forecast of 8.5 percent growth.

"Domestic factors argue for further tightening while the uncertainty about the U.S. outlook suggests a wait-and-watch approach," said A. Prasanna, analyst at ICICI Securities, Mumbai.

Separate data showed the wholesale price index rose 4.56 percent in the 12 months to Sept. 16, lower than 4.61 percent a week earlier and a forecast of 4.86 percent in a Reuters poll.

The Reserve Bank of India (RBI), which raised its key short-term interest rate three times during 2006 to cool the economy and check inflation pressures, next reviews policy on Oct.31. At its last review in July, the RBI increased rates by 25 basis points to 6.0 percent.

Finance Minister Palaniappan Chidambaram said the government would take monetary and fiscal measures to contain inflation at 4 percent or less.

"By and large, first-quarter GDP performance has been good and inflation as of today seems to be moderating over last few weeks," Chidambaram said at a news conference.

Ten-year bond yields had rallied to a four-month low of 7.54 percent earlier this week as investors chose to ignore robust economic indicators, preferring to focus on lower oil prices and expectations that rates in the United States may have peaked.

The benchmark 10-year bond yield rose to 7.66 percent on Friday from 7.65 percent before the data, but it was still nearly 80 basis points under a 4-1/2-year high hit in July.

Manufacturing scorhes

Agriculture -- which accounts for about 23 percent of GDP -- grew at an annual pace of 3.4 percent in the quarter, slowing from 5.5 percent in January-March.

But the drag in farm sector produce was offset by manufacturing output, which accounts for nearly 15 percent of GDP. It expanded by an annual 11.3 percent, faster than the growth rate of 8.9 percent in January-March.

Earlier data showed industrial production in July rose 12.4 percent from a year earlier, its fastest annual pace in a decade.

Factory output has been on the rise since a bumper monsoon in 2003 boosted farm production and spurred spending in rural areas, where about two-thirds of India's billion-plus population live.

"Clearly we have a strong structural story for India's economy. At this point of time, despite very robust growth, we expect official policy rates to hold steady," said Shubhada Rao, chief economist at Yes Bank.

The strong activity has seen bank loans to the commercial sector grow at more than 30 percent in annual terms, while healthy consumer demand has led to annualised money supply growth of 19.4 percent.

"Growth is higher than most analysts estimate, and with this sort of growth the global confidence in the Indian economy will certainly increase. We reiterate our stance of an interest rate hike in October," said S.P. Prabhu, analyst at IDBI Capital.

The government is aiming for 8.0 percent growth in 2006/07 and the central bank has forecast growth at 7.5-8.0 percent.