India’s industrial production grew at the fastest pace in 25 months in November, strengthening the case for the central bank to raise interest rates in the first half of this year.

The acceleration of India’s economy, Asia’s third-largest economy, parallels a rebound in China that may also see policy makers there boost borrowing costs in coming months. India’s biggest stock-market advance in 18 years, along with fiscal and monetary measures, have stoked demand for cars made by Maruti Suzuki India Ltd. and plasma screens from LG Electronics Inc.
“The RBI will prefer to normalize the monetary setting following the aggressive and successful easing to cushion the economy,” said Rajeev Malik, an economist at Macquarie Group Ltd. in Singapore, said before the report. The Reserve Bank of India will raise ratio of assets that banks must hold in cash at or before its next policy review on Jan. 29, he added.
------Bonds, stocks
India’s bonds fell and stocks rose after the report. The yield on the 10-year government note gained 6 basis points to 7.71 percent as of 12:12 p.m. in Mumbai, according to the central bank’s trading system. The Bombay Stock Exchange’s Sensitive Index, or Sensex, gained 0.4 percent to 17,587.21 at 12:02 p.m.
Economies are recovering across Asia after the region’s policy makers unveiled about $1 trillion in stimulus measures and cut rates to spur growth. China’s industrial production rose 19.2 percent in November and its exports climbed 17.7 percent in December.
Recent data show growth is gaining traction in India as well, with manufacturing rising at the fastest pace in seven months in December, according to the Purchasing Managers’ Index compiled by HSBC Holdings Plc and Markit Economics. Exports surged to a 15-month high in December after rising 18.2 percent in November, the first increase in 14 months.
RBI Governor Duvvuri Subbarao “should begin monetary action by shrinking the excess liquidity in the local money markets and then move to increasing policy rates around March and April,” Macquarie’s Malik said. The central bank “will be concerned about the excess liquidity and second-order inflationary effects of high food inflation.”
-----Food prices
India’s benchmark wholesale-price inflation rate rose to 4.78 percent in November, more than three times October’s 1.34 percent. Wholesale food prices soared 18.22 percent in the week to Dec. 26 from a year earlier, near the most in 11 years.
“With both growth and inflation heading toward 8 percent, we expect the Reserve Bank of India to start increasing its policy rates in January,” said Sonal Varma, a Mumbai-based economist at Nomura Securities Co., Japan’s largest brokerage.
Subbarao slashed the cash reserve ratio by 400 basis points to 5 percent between October 2008 and January 2009 to shield the economy from the global recession. The central bank has left its reverse repurchase rate and repurchase rate unchanged since April, after respective cuts of 2.75 percent and 4.25 percent.
By comparison, China’s one-year lending is at a five-year low of 5.31 percent and its one-year deposit rate is 2.25 percent.
-------------Fridges, TVs
Manufacturing output increased 12.7 percent in November from a year earlier, accelerating from an 11.1 percent gain in October, the report showed. Mining grew 10 percent, compared with 9 percent in the previous month and electricity rose 3.3 percent from 4.7 percent. Production of consumer durables such as refrigerators and televisions surged 37.3 percent in November, compared with a 20.2 percent gain.
Prime Minister Manmohan Singh last year cut taxes on consumer products, increased spending on roads and utilities, raised salaries for government workers and waived farm loans.
The central bank injected about $130 billion into India’s banking system by reducing interest rates and lowering lenders’ reserve requirements. That helped the $1.2 trillion economy to grow 7.9 percent in the three months ended Sept. 30, the most in 1 1/2 years.
Faster growth has attracted overseas inflows into stocks, taking the Sensitive Index to the highest in 18 years in 2009. The rupee gained 4.8 percent.
----------------Surpassing China
India’s growth may quicken to 10 percent in a “couple of years,” exceeding that of China as early as 2014, Kaushik Basu, chief economic adviser to the South Asian nation’s finance ministry, said Jan. 4. The government has no plans to “suddenly” withdraw last year’s stimulus, he said.
The strength of the Indian economy is enticing foreign companies to expand and set up operations. Toyota Motor Corp., Volkswagen AG and other carmakers introduced 10 new models at the Delhi Auto show last week. Passenger car sales hit 1.43 million units in 2009, the most in three years, according to the Society of Indian Automobile Manufacturers on Jan. 8.
ArcelorMittal, the world’s biggest producer of steel, and Posco, the sixth-biggest maker of the alloy, plan to set up new steel mills in southern India. Posco will invest 323 billion rupees ($7 billion) on a mill in Karnataka state, the regional government said Jan. 7. ArcelorMittal plans to sign an accord in June for a 300 billion-rupee project in the same state.
(Source: Bloomberg)