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India may up rates as GDP grows 7.7pc

New Delhi, August 31, 2011

India's economy grew at its weakest pace in six quarters but outperformed even gloomier predictions, reinforcing expectations the central bank will keep raising interest rates to put a lid on inflation.

Gross domestic product (GDP) growth in Asia's third-largest economy slipped to 7.7 per cent in the three months through June, slightly exceeding the median forecast in a Reuters poll for an annual rise of 7.6pc.

"The latest growth number reinforces the view that although growth is slowing down, it is not collapsing as feared by some," said Ashutosh Datar, economist at IIFL in Mumbai, who said another 25 basis point increase at the central bank's next policy review on September 16 was likely.

India's economy grew 7.8pc in the previous quarter.

The Reserve Bank of India's (RBI) 11 interest rate increases since March 2010, including a sharper-than-expected 50 basis point increase last month, have failed to bring inflation under control, but have undermined sentiment and demand in an economy that grew at 8.5pc in the fiscal year that ended in March.

Wholesale prices grew 9.22pc in July, the latest inflation data shows, a tad below June's 9.44pc, but well above the central bank's 4-4.5pc comfort zone.

India's slowing growth is the latest sign of cooling in the big emerging BRIC economies. Brazil's economic activity fell in June from a month earlier, the first such drop since late 2008, while China posted slower growth in its June quarter.

India's benchmark 10-year federal bond yield rose two basis points to 8.35pc after the data failed to weaken the case for a rate increase at the next policy review in September.

The one-year overnight indexed swap rate rose five basis points to 7.85pc while the five-year rose three basis points to 7.03pc.

Dealers said the move reflected expectations of a maximum 50 basis points more rate increases in 2011, after which the central bank may press the pause button.

Construction was a dark spot in the data, rising just 1.2pc annually, down from 7.7pc a year earlier, as higher interest rates dampened the housing market and big-ticket projects were plagued by delays in approvals.

In Mumbai, India's biggest and most expensive city for real estate, residential sales slumped to a 30-month low in the quarter to end-June, leaving the city with more than 100 million square feet of unsold real estate, according to data by Liases Foras Real Estate Rating and Research.

"The slowdown in construction is less pleasing at face value, but overall this robust report should leave RBI on track for one more 25 basis point hike this year," said Sean Callow, senior currency strategist at Westpac Institutional Bank in Sydney.




Tags: India | Rates | GDP growth |

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