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India’s June factory output slows, outlook steady

Analysts said output would soon stabilise 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.

Inflation inches up

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 by making it more expensive to raise loans for capacity expansion, analysts said.

Manufacturing, which makes up about 15 percent of gross domestic product and nearly 80 percent of industrial output, rose 10.6 percent in June from a year earlier, compared with a upwardly revised 11.7 percent in May.

“Some amount of deceleration in the manufacturing sector is apparent and obvious now. Industrial output may slow a little bit more but should be stabilising,” said Indranil Pan, chief economist at Kotak Mahindra Bank in Mumbai.

Industrial output, which generates a fifth of economic activity, has been driven by strong consumer demand for items such as cars and mobile phones.