NEW DELHI, 12 August 2007 — India’s industrial production in June grew at its slowest annual pace in eight months as tighter monetary policy trimmed consumer demand and the rupee’s rise to nine-year highs hindered exports.
Analysts said output would soon stabilize on strong investment in capital goods as Indian firms add capacity and projects on much-needed infrastructure improvements continue.
Friday’s data showed June output grew 9.8 percent from a year earlier, lower than the 10.6 percent forecast in a Reuters poll of analysts and May’s downwardly revised growth of 10.9 percent.
It was the first time annual growth had fallen below 10 percent since last October, and analysts said the impact of five increases in official interest rates between June 2006 and late March and the rise of the rupee was starting to be felt.
“The first half had retained some momentum of last year. Now, the lagged effect of interest rate increases and slowdown in exports are showing up,” said Abheek Barua, chief economist at HDFC Bank.
“I expect the trend to sustain but output growth won’t go significantly below 9 percent in the second half.”
While growth in consumer goods has slowed, capital goods grew 29 percent in June from a year earlier, underscoring the investment in infrastructure and capacity expansion that is expected to sustain industrial output growth at robust levels.
Separate data showed the wholesale price index rose 4.45 percent in the 12 months to July 28, its biggest increase since early June and slightly higher than an expected rise of 4.41 percent, due to higher food and manufactured product prices.
Analysts said the data showed price pressures persisted, particularly as recent readings have subsequently been revised higher.
“The upward revisions remain a concern, because the provisional numbers continue to be much lower than the final numbers,” said Namrata Padhye, analyst at IDBI Capital Markets.
“Food prices remain volatile, and we continue to see price pressures from manufactured products.”
The partially convertible rupee firmed to 40.62/63 per dollar from 40.67/68 before the data, and the yield on the 10-year federal bond edged down to 7.97 percent.
The rupee hit a high of 40.20 per dollar last month, at which point it was up 10 percent in 2007 and trading at its strongest level since May 1998, and exporters have been complaining to the government about their loss of competitiveness.
Indian exports in June grew by 14 percent from a year earlier, slower than annual growth of 18 percent in May and 23 percent in April.
An increase in banks’ reserve requirements that took effect this month could further crimp output growth.