India Factory, Inflation Data Add to Concerns Over Economic Recovery

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India Reports Disappointing Industrial Growth; Consumer Inflation Hits Double Digits - WSJ.com

NEW DELHI—India Tuesday reported data that deepened concerns about its economy, as industrial production expanded at a tepid pace and a pickup in consumer inflation limited room for growth boosters.

Government data showed the index of industrial production in September rose 2.0% from a year earlier. That fell way short of market expectations for a 3.6% increase, according to the median estimate in a poll of 19 economists by The Wall Street Journal.

Meanwhile, consumer inflation returned to the double-digit rate after seven months in October, accelerating at 10.09% compared with 9.84% a month earlier, because of pressure from high food prices.

The numbers come as a dampener after October trade data a day earlier showed encouraging trends, with exports rising at a double-digit pace for the fourth successive month and the country's trade deficit narrowing to about half the year-earlier level. Government officials have been forecasting the economy to start recovering from the October-March period, or the second half of the current fiscal year, after growing at a decade-low pace of 5% last year.

Analysts were looking for signs of an economic pickup in the industrial-production data, especially after the government earlier said infrastructure output, which accounts for nearly 40% of India's index of industrial production, rose at a healthy 8% in the past month. Also, September comes at the beginning of India's high-spending festival season.

"We don't see any decisive turnaround in India's growth story," D.K. Joshi, chief economist at rating firm Crisil, said responding to Tuesday's data.

And, even as growth continues to languish, "inflation appears to be a bigger bugbear," raising the possibility of yet another rate increase by the central bank next month, Mr. Joshi said.

The Reserve Bank of India has increased its policy lending rate by a quarter percentage point each in September and October, ignoring calls from businesses to reduce it. India's industry blames high borrowing cost for part of the economy's woes as this has hurt their investments and expansion. The RBI says its primary focus is on controlling inflation.

Anjali Verma, an economist at PhillipCapital, said she expects the RBI to raise the main interest rate again by a quarter percentage point at the next monetary-policy meeting in December. "We also attach slight possibility of one more rate hike after that, if rising food inflation trend does not correct somewhat," she said.

More rate increases will be bad news for industry.

India's industrial production has declined in two of the six months in the current fiscal year that began in April, after a weak 1.1% increase in the last fiscal year. Poor infrastructure facilities such as potholed roads, crowded ports and airports as well as a slow change in policies needed to facilitate business are also hampering industrial growth.

Over the past year, authorities have tried to revive investments by easing foreign-investment restrictions and resolving bureaucratic hurdles holding up industrial and infrastructure projects. But economists say these will take time to show results and investments may not pick up until after next year's general election when investors will have more clarity on the policies of the government over the next five years.

According to Tuesday's data, manufacturing output, which has a 75% weight in the index of industrial production, rose 0.6% from a year earlier in September. Mining output rose 3.3% from a year earlier while electricity production increased a robust 12.9%.

"We expect growth in manufacturing to be subdued in the coming months as a result of the current slowdown in domestic demand and a lack of investor optimism given the usual uncertainty that builds around elections," said Naina Lal Kidwai, president of the Federation of Indian Chambers of Commerce and Industry, a lobby group.

—Mukesh Jagota contributed to this article.

Write to Anant Vijay Kala at anant.kala@wsj.com

 

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An economy that's growing at 4% with 10% inflation。

Shouldn't it be the other way round？

 

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Rajan urges 'deep breath' after market tumble| Reuters

MUMBAI Wed Nov 13, 2013 6:51pm IST

(Reuters) - Reserve Bank of India (RBI) governor, Raghuram Rajan, expressed comfort on Wednesday about core inflation and highlighted the narrowing current account deficit as he sought to reassure investors worried the country would be hit hard in a global market sell-off.

Most immediately, he pledged to move slowly if needed in winding down an oil window that provides dollars directly to state-run oil companies, while announcing a bond purchase of 80 billion rupees on Monday to inject liquidity in markets. Both had been key concerns in markets.

The news briefing, announced earlier in the day, was an unprecedented departure for the traditionally cautious central bank. Since taking the helm of the RBI in September, Rajan has pledged to be more communicative and has so far been warmly welcomed by investors.

Still, Rajan's remarks had a mixed impact on markets, sending benchmark 10-year bond prices rallying, although the rupee failed to gain much despite ending the day well above a two-month low hit earlier. Stock markets were already closed.

"It's important that the RBI clarifies interpretation of economic events and the likely direction of economic policies at times of uncertainty so that the market worries about the right things and does not get into a tizzy about the wrong ones. That is my quote today," Rajan told reporters.

"There is no fundamental reason for volatility in value of the rupee," he also said. "At some time, it makes sense to take a deep breath and examine the fundamentals. I hope you all will do that."

Rajan addressed reporters after stronger-than-expected U.S. jobs data last week had sparked concerns about an early end to the Federal Reserve's stimulus, hitting the rupee and sending Indian bonds and shares tumbling, although markets remain well above the levels of the summer lows.

Some investors had started to fear a repeat of the summer, when the rupee slumped to a record low of 68.85 to the dollar, punished by worries about the country's vulnerability should foreign investors sell because of Fed tapering.

Analysts also cited some comfort from the governor's remarks on inflation given the RBI has raised interest rates by a half percentage point since September in two back-to-back actions as it fights off rising consumer prices.

Worries about yet another rate hike had gripped investors after India reported late on Tuesday consumer price inflation accelerated more than expected to 10.09 percent in October from 9.84 percent in September.

At his briefing, Rajan called food inflation "worryingly high", but said he was comforted by a downward trend in the core consumer price index.

"The RBI has attempted to calm the market by verbal intervention. On the policy front, it seems clear that the governor is in no hurry to hike the repo rate," said Upasna Bhardwaj, economist with ING Vysya Bank.

Rajan also surprised analysts by saying the RBI's estimate for the current account deficit for the fiscal year ending in March was $56 billion, the first time in recent memory the central bank has given such a forecast.

That puts the RBI's estimate in line with the government's after Finance Minister P. Chidambaram said this month the current account gap would reach $60 billion, well below its previous estimate of $70 billion.

India's current account had been a key source of stress during the summer sell-off, but has become less of a concern as the trade deficit has narrowed on government action to curb gold imports and to raise funds from abroad.

Rajan also sought to reassure investors worried about the rupee's stability after the RBI has allowed oil companies to source dollars directly in markets instead of a special window provided by the central bank.

That window was opened as an emergency measure by the RBI in late August and was cited as a key reason behind the recovery in the rupee, which is still up 8.8 percent since its record low in late August.

Rajan said the RBI had flexibility in managing the return of oil companies to markets, and would go slow if needed.

The rupee strengthened to 63.31 from its 63.71/72 close on Tuesday, while benchmark 10-year bond yields slumped 13 basis points to 8.92 percent, marking the biggest fall in five weeks.

 

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The rupee’s continuing troubles - The Hindu

OPINION » EDITORIAL
November 13, 2013

The rupee is in trouble, yet again.

The currency has been sliding in the last five trading sessions, to close at Rs.63.71 versus the dollar on Tuesday. A convergence of unfavourable factors appears to be behind the renewed fall in the currency after the relative stability of the last few weeks.

The immediate trigger was the positive news emerging from the U.S. The global economic engine last week reported a better-than-expected 2.8 per cent growth in the third quarter ended September. This was immediately followed by encouraging non-farm payrolls data which showed that more jobs were added in October than expected. These data have set off fears that the Federal Reserve might start the tapering of its $85 billion monthly bond-buying programme as early as in December or January. Foreign institutional investors have turned net sellers in the domestic market in the last few trading sessions. It is not coincidental that since November 6, the day the rupee lurched into its latest turbulence, FIIs have sold $438.50 million in the debt market. The return of fears over tapering is strengthening the dollar against other Asian currencies as well, as global fund flows head back to the U.S. in anticipation of rising bond yields.

There are a couple of domestic factors too that seem to be working against the rupee.

The most important of these is the partial closure of the special window that was opened by the Reserve Bank of India (RBI) for oil companies to buy their dollars directly from the central bank. With apparent stability prevailing over the last few weeks, the RBI pushed back into the market almost half of the oil companies’ dollar requirements, causing demand for the greenback to rise.

Also, a couple of special measures initiated by the central bank at the peak of the crisis to support the rupee by attracting dollar inflows, such as the swap window for foreign currency deposits, are supposed to close by the end of this month. These factors, along with the possibility of the Federal Reserve starting the tapering process, point to a period of weakness ahead for the rupee.

The RBI may well find itself forced to extend some of the supportive measures put in place earlier. What is heartening though is that there has been a perceptible improvement in the external account since the last round of volatility a couple of months ago. Trade data for October, the latest available, show acceleration in exports and a significant fall in imports; if these trends sustain, the current account deficit, which was acting as a drag on the rupee during the last spell of volatility, could be around $60 billion or 3-3.2 per cent of GDP. Yet, this may not be enough to support the rupee if FIIs decide to take their money back to the U.S.