Industrial output eases; rate rise still seen

Nifty BSE | NSE 29/05/12 Are Mutual Funds betting on Nifty?

India's industrial output grew less than expected in February, suggesting that a recent surge in production was beginning to ebb, but rising inflation kept markets betting on another interest rate rise next week.

Investors have already priced a 25-basis point rate rise at the Reserve Bank of India's policy review on April 20 after it raised rates last month and a softer production figure had only a fleeting market impact.

The yield on the 10-year bond dipped 2 basis points to 8.03% after the data, but quickly bounced back to retest its 18-month high of 8.07%.

"The number to watch now is inflation, and if it stays in the 10% range, especially with non-food inflation not accelerating, this bodes well for our forecast that the Reserve Bank of India's (RBI) post-April 20 tightening will be measured and moderated," said Atsi Sheth, chief economist at Macro-Sutra in Mumbai.

Capacity constrains

The RBI had cited increased capacity utilisation as one of the principal factors driving up inflation and analysts expect the RBI to try to cool demand until companies boost their potential output.

"The bad news for the RBI is that it will take some considerable time before the extra capacity comes on stream," said Robert Prior-Wandesforde, senior Asian economist at HSBC.

"The net result is likely to be higher underlying inflation which is already looking troublesome. In our view, the central bank remains considerably behind the curve."

The latest Reuters poll shows analysts expect rates to go up by further 100 basis points between now and the end of the year.