Factory growth expands at weakest pace in 20 months

Indian factory growth fell for the third month in a row in July as a long series of interest rate hikes and faltering global demand weighed on new orders and output growth, a survey showed on Monday.

The HSBC Markit Business Activity Index, based on a survey of around 500 companies, fell to a 20-month low of 53.6 in July from 55.3 in June, though it remained above the 50 mark that separates growth from contraction for the 28th consecutive month.

The July reading was the weakest expansion since late 2009 and reflected the dampening of demand from key markets such as the United States and euro zone, which are reeling from their own respective debt crises.

"The momentum in the manufacturing sector eased further in July as sequential growth in output and new orders slowed," said Leif Eskesen, chief economist for India & ASEAN at HSBC.

Among the sub-indexes, the steepest fall was seen in new orders which dropped to 54.5 in July from a previous reading of 60.1.

India's hitherto rapid economic growth seems to be slipping, partly due to choppy economic conditions globally, but mainly due to the Reserve Bank of India's (RBI) continuous rate hikes as it struggles to stomp out rampant inflation.

The RBI stunned markets last week by raising interest rates by 50 basis points, indicating that it was nowhere near the end of its policy tightening cycle and the focus was still firmly on controlling inflation.

The repo rate, at which the RBI lends to banks, was raised to 8% from 7.50%, beating expectations of a 25 basis point hike predicted by economists in a Reuters poll.

Asia's third largest economy has seen a marked slowdown recently with industrial output growing at a feeble 5.6% in May, its slowest in nine months.

The economy grew at its slowest annual pace in five quarters in January to March at 7.8% from a year earlier causing many to believe the central bank might rethink the pace at which tightens its policy noose.

However with headline wholesale price index (WPI) inflation at 9.44% in June, more than double the central bank's comfort level and expected to stay high in coming months, the RBI is unlikely to refrain from further rate hikes.

Input prices rose sharply in July, driven by higher raw material costs, causing manufacturers to charge more for their products, the PMI survey showed. Sub-indexes for both input and output prices remained at elevated levels.

"These numbers confirm that inflation pressures remain firmly in place despite the ongoing moderation in growth. The RBI will, therefore, have to maintain its tightening bias for a while still to anchor inflation expectations," said Eskensen.

India's parliament is set to tackle thorny, though pivotal economic reforms this week in an effort to improve business climate and development, but political wrangling and corruption could strangle hopes for swift progress.