India’s economy expanded 7.9 percent last quarter, the fastest pace in one-and-a-half years, giving the central bank room to withdraw more stimulus to check inflation.
GDP expanded 7.9 percent in the three months to Sept. 30 from a year earlier as manufacturing jumped 9.2 percent, the statistics bureau said in New Delhi yesterday. That was more than all estimates in a Bloomberg News survey of 22 economists, where the median forecast was 6.3 percent.
“India’s GDP growth is positioning for an upswing,” said Rajeev Malik, a Singapore-based regional economist at Macquarie Group Ltd. “A handle-with-care exit is on the cards.”
To steer India’s US$1.2 trillion economy through the worst global financial crisis since the 1930s, Governor Subbarao has kept the central bank’s key reverse repurchase rate at a record-low 3.25 percent since April. Government spending and tax cuts took the value of stimulus measures to 12 percent of GDP.
Inflation pressures are building as economic growth quickens and after the weakest monsoon rains since 1972 hurt farm output, pushing up food costs. The central bank forecasts inflation of 6.5 percent by March 31 from 1.34 percent in October and 0.5 percent in September. During last year, the rate rose to almost 13 percent.
“Given the magnitude of easing and the speed at which inflation has bounced back, monetary policy will need to be tightened fairly soon,” the Paris-based Organization for Economic Cooperation and Development said on Nov. 19.
Falling bond yields signal that investors don’t expect interest rates to rise this year.
“We see inflation risks emerging and expect interest-rate hikes from January 2010,” said Ramya Suryanarayanan, an economist at DBS Group Holdings Ltd in Singapore.
Food inflation, which has climbed to 15.58 percent, is a politically sensitive issue in a nation where the World Bank estimates that three-quarters of the population live on less than US$2 a day.
With the second-fastest growth of any major economy, trailing only China, India is drawing investment from companies including South Korea’s Samsung Electronics Co and French tiremaker Michelin & Cie, which said this month that it will add a factory in the southern state of Tamil Nadu.
Prime Minister Manmohan Singh said this month that returning to the 9 percent growth pace that India averaged between 2004 and last year is “eminently feasible” in the medium term because a national high savings rate will aid investment.
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