India auto factory

Economic uncertainty around the globe and high interest rates at home are finally hitting India’s factories hard.

Industrial output growth in July plunged to 3.3 per cent, its lowest level in nearly two years. But investors are betting that it still won’t be enough to stop a hawkish central bank raising rates one more time at its policy review this Friday.

The 3.3 per cent figure – well down on the consensus forecast of 6.2 percent in a Reuters survey – surprised the markets.

The Sensex equities index fell by more than 2 per cent on the news and was later down by more than 2.5 per cent. To be fair, with Asian markets generally catching up on a bad day on Friday in the US and Europe, the IP numbers weren’t the only influence at play. Japan’s Nikkei 225 clsoed down 2.3 per cent and the Hang Seng finished a full 4.25 per cent lower.

The monthly IP numbers are notoriously volatile. The slowdown was driven by a 15.2 per cent drop in capital goods output which contrasted with a 38.2 percent growth surge in June.

The central bank has said that it is watching closely the recent turmoil in the world’s financial markets and evidence of economic deceleration. But with headline inflation at 9.2 percent in July and August numbers due on Wednesday likely to show a similar increase, the Reserve Bank of India is still expected to raise rates on Friday.

The bank last raised rates only in July 26, when the repurchase rate was hiked by 0.5 per centage points to 8 percent, in the 12th increase since March 2010. The evidence suggests inflation may be peaking but not as rapidly as the central bank would wish. In July, it raised its forecast for the inflation rate at the end of March from 6 per cent to 7 per cent.

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