India's annual growth hits 8.8 per cent in Q1
(Reuters)
31 May 2008
NEW DELHI — Surprisingly strong Indian growth and a jump in inflation above eight per cent put an interest rate rise back on the agenda yesterday, although many analysts thought the central bank would remain focused on cash management.
The finance minister said there was no sign of inflation declining and more steps would be taken if needed after wholesale price inflation rose 8.1 per cent in the 12 months to May 17, its highest in more than three years.
Annual growth of 8.8 per cent in the Jan-March quarter outstripped forecasts for 8.2 per cent, showing momentum remained strong in Asia’s third-largest economy in the fiscal second half despite policy tightenings, although economists expected it would lose height in 2008-09.
The strong data comes as the government is debating whether to raise state-set retail fuel prices to tackle mounting losses at state oil firms forced to sell fuel at discounted rates, a move which would also put pressure on prices. “Monetary policy will continue to remain tight and it seems the Reserve Bank of India’s first priority is to target liquidity,” said A. Prasanna, economist at ICICI Primary Dealership in Mumbai.
“But with inflation continuously surprising on the upside and a fuel price increase in the offing, a repo rate hike cannot be ruled out.”
The central bank has left it key lending rate, the repo rate, unchanged at 7.75 per cent for over a year. But it has been tightening cash conditions over the past 18 months, most recently in April and May when it raised the cash reserve ratio, the amount of funds banks must deposit with it, by 75 basis points to a seven-year high of 8.25 per cent.
The rupee took both sets of data largely in its stride, edging up to 42.52 per dollar while the benchmark 10-year bond yield rose to 8.11 per cent from 8.08 per cent shortly before the price data came through.
Inflation: The WPI is India’s most widely watched price measure and the mid-May reading outstripped forecasts for an annual rise of 7.96 per cent and the previous week’s 7.82 per cent.
Finance Minister Palaniappan Chidambaram said yesterday price pressures stemmed largely from abroad, particularly oil, and there were no easy solutions. The government has already curbed some exports and lowered duty on some imports to keep domestic supplies up and import prices down.
“We will take more measures if needed,” he said. “We will take corrective measures to control inflation.”
He expected the economy would grow 8.5 per cent in 2008-09 after data yesterday showed 2007-08 growth at 9.0 per cent, higher than a first estimate of 8.7 per cent.
“The current financial year appears even more difficult than the year that has come to an end, but I am confident we will maintain growth,” he said.
Growth for the December quarter was revised up to 8.8 per cent and the full-year reading gave India its third successive fiscal year of expansion at 9 per cent or above, to be the world’s fastest-growing major economy after China.
“Even though the industrial sector has been hurt by past interest rate hikes, the services sector continues to grow at a fast pace,” said Sonal Varma, economist at Lehman Brothers.
Varma expected high oil prices, financial market turbulence and slowing world demand would provide headwinds to the economy in the fiscal year to the end of March 2009.
“The question is whether the services sector can sustain this pace, despite industry slowing down. We have our doubts,” she said.
Manufacturing grew an annual 5.8 per cent in the quarter, slowing from 9.6 per cent in the December quarter, while services grew 11.2 per cent in the quarter.
Farm output grew an annual 2.9 per cent in the March quarter compared with 6 per cent in the prior three months.
