Tue, Jun 01, 2010 page11

• Indian economy rises 8.6%

  RATE QUANDARY Analysts say demand-side pressure on interest rates is growing, as is the pressure on the Reserve Bank of India, but the bank has limited options

  • BLOOMBERG
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  India’s economic growth accelerated, adding pressure on the central bank to raise interest rates even as Europe’s sovereign-debt crunch threatens the global recovery.

  GDP rose 8.6 percent in the three months ended March 31 from a year earlier after a revised 6.5 percent gain in the previous quarter, the statistics office said in a statement in New Delhi yesterday. That matched the median estimate in a Bloomberg News survey of 22 economists.

  India and China, the world’s fastest-growing major economies, are weighing the risk of Europe’s debt crisis reducing demand in the market that accounts for a fifth of their exports. For India, the room to pause on monetary tightening is limited because its benchmark inflation rate is more than three times that in China.

  “Demand-side pressures are building up, which is a worrying sign for inflation,” said Vishnu Varathan, a regional economist at Forecast Singapore Pte. “It will be difficult for the Reserve Bank of India to retract itself from normalizing interest rates.”

  India’s central bank said on May 19 that it will raise rates only cautiously even though they are “out of line” with the key wholesale-price inflation rate, running at 9.59 percent. In comparison, China’s US$4.3 trillion economy expanded 11.9 percent in the first quarter and consumer prices rose 2.8 percent in April from a year earlier.

  India’s Sensitive Index gained 0.2 percent to 16,900.53 at 12:05pm on the Bombay Stock Exchange. The yield on the 10-year government bond advanced 2 basis points to 7.52 percent from before the report.

  The rupee was little changed, maintaining its 4.5 percent drop against the US dollar this month, boosting import costs and impeding central bank Governor Duvvuri Subbarao’s efforts to cool inflation.

  Manufacturing rose 16.3 percent in the three months through March from a year earlier, compared with a 13.8 percent gain in the previous quarter, yesterday’s report showed. Farm output rose 0.7 percent from a contraction of 1.8 percent and mining grew 14 percent.

  European Central Bank President Jean-Claude Trichet said yesterday that emerging nations have weathered the global recession better and are a “source of strength” for the world economy. GDP in the euro region rose 0.5 percent in the first quarter from a year earlier, the EU’s statistics office said.

  Growth in India’s US$1.2 trillion economy, Asia’s largest after Japan and China, is accelerating as rising incomes boost demand for cars, cellphones and air travel. Salaries in India may increase at the fastest pace in the Asia Pacific this year, said Hewitt Associates Inc, the Lincolnshire, Illinois-based human resources adviser.

  Car sales by companies including Maruti Suzuki India Ltd and Tata Motors Ltd rose 39.5 percent in April from a year earlier, the biggest jump for the month since 1999, the Society of Indian Automobile Manufacturers said.

  Services including air travel, which account for about 55 percent of India’s economy, expanded the most in 21 months in April, according to the Purchasing Managers’ Index released by HSBC Holdings Plc and Markit Economics.

  Some economists say the government has made slow progress in creating new capacity in infrastructure such as power, roads and ports, which is adding to inflation pressures and limiting economic expansion.

  “The shortage of infrastructure has an adverse impact on growth and it increases the cost of operations for companies,” said Shashanka Bhide, chief economist at the New Delhi-based National Council of Applied Economic Research.
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