Tuesday September 13, 2011

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By Taru Sugandha  ( Assistant Editor )

Reserve Bank of India: Higher lending rates are necessary even if at the cost of low economic growth

INDIA`S industrial output grew just 3.3 per cent year-on-year in July; it’s the slowest in nearly two years, according to the official data. It indicates a wider slowdown in Asia`s third largest economy.

The lower than expected figure - the worst since October 2009 and following 8.8 per cent growth in June will provide another headache for the central bank as it tries to tame inflation as economic growth eases.

Output at factories, utilities and mines was hit by manufacturing activity, which grew at 2.3 per cent year-on-year, down from 10.8 per cent in the same period in 2010.

Capital goods production, meanwhile, shrank 15.2 per cent against growth of 40 per cent a year earlier, the Central Statistical Office said.

Indian shares, which had already opened weak on the back of global losses, slid 2.75 per cent to 16,403.94 points in afternoon trade, after the data came in.

The figures are fresh bad news for the Reserve Bank of India (RBI), which has been under pressure from worried businesses to pause its cycle of hiking interest rates.

The bank has raised benchmark lending rates 11 times since March 2010 to curb stubbornly high inflation currently at 9.22 per cent, stoked by rising food and fuel prices.

Last month, India posted its slowest gross domestic product (GDP) growth in six quarters, up 7.7 per cent year-on-year, as expansion was hit by the longest stretch of monetary tightening in a decade.

And despite the below-par output and voices growing for a pause in monetary policy tightening, the RBI is still likely to raise rates once again later this week before it decides on a pause, economists say.

The hawkish RBI will look to annual inflation data which is due on Wednesday (September 14) more closely as it continues to maintain its anti-inflationary stance.

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