India's Industrial Sector Still Red Hot

India's economy is forecast to grow 8.5% this fiscal year and the central bank has warned of capacity constraints that are fuelling inflation as factories work at full tilt and supply struggles to keep up with demand.

India's manufacturing growth picked up pace in July driven by new orders, the Purchasing Managers' Index (PMI) showed on August 2.

The PMI climbed to 57.6 from 57.3 in June, marking the 16th month the reading has been over 50.

The index reading, which is keenly watched as a signal of industrial growth, was another indicator of strong demand in Asia's third-largest economy, which has rebounded from the global financial downturn, analysts said.

"The industrial sector is still running red-hot," said Frederic Neumann, HSBC co-head of Asian economics, forecasting that "robust demand will keep (manufacturing) orders pouring in."

But Neumann said that "recent rate hikes notwithstanding, the Reserve Bank of India is nowhere done. Rates need to go higher, and higher again, to temper inflation and avoid an ultimate hard landing."

Last week, the Reserve Bank raised short-term rates for a fourth time this year in a bid to cool an inflation rate of 10.55% that is being driven by high food costs, an expanding economy and rising wages.

But the PMI showed a jump in both input and output prices, "underlining that price pressures remain a big problem," said Sukhy Ubhi, economist at Capital Economics.

He forecast the Reserve Bank would hike both its repo rate, the rate at which it lends to commercial banks, and the reverse repo, the rate it pays to banks for deposits, by 25 basis points at its next policy meeting in September.

The Indian PMI figures contrasted with HSBC's China PMI which showed a cooling of manufacturing output as the government scales back stimulus measures to avoid overheating.

The headline index figure fell below the critical 50 level in July to 49.4 for the first time since March 2009 when the global slump was at its peak.

India's economy is forecast to grow 8.5% this fiscal year and the central bank has warned of capacity constraints that are fuelling inflation as factories work at full tilt and supply struggles to keep up with demand.

The rise in India's July PMI was fueled by the forward looking new orders component, with the orders index registering a robust 62.8. The figure was well above long-run average levels and pointed to double-digit gains in manufacturing output in coming months with domestic demand rather than exports the main source of new orders, economists said.

Release of the PMI coincided with a jump in Indian automobile sales announced the same day. India's top carmaker Maruti Suzuki reported its sales had jumped 29% to 100,857 vehicles in July from a year earlier.

Copyright Agence France-Presse, 2010

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