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April Factory Output Soars; Inflation Eyed

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India's industrial output grew at a much stronger-than-expected pace in April, reinforcing expectations the Reserve Bank will lift rates for the third time this year at a policy review late next month.

Industrial output rose 17.6 per cent in April from a year earlier, the strongest since December 2009, helped by buoyant domestic consumer demand, a revival in exports, and higher infrastructure spending, data showed on Friday.

But Rupa Rege Nitsure, chief economist at Bank of Baroda in Mumbai, said the industrial output numbers have been boosted by a low base effect which will start fading from June.

"If investment growth picks up then for the year as a whole, IIP can be expected somewhere between 8.5-9 per cent in FY11. This surely gives more elbow room to the Reserve Bank of India to pursue monetary tightening," she said.

A top government adviser, Planning Commission Deputy Chairman Montek Singh Ahluwalia, said after the data release that the pace of monetary policy normalisation need not be quickened.

Worries over Europe's debt crisis and the health of the global economic recovery, concerns also expressed by most other central banks in Asia, are expected to prevent the RBI from tightening more aggressively.

The Reserve Bank of India is widely expected to raise rates by 25 basis points on July 27.

The next key data will be wholesale price (WPI) inflation data for May, due on Monday. A Reuters poll shows headline inflation probably held steady around 9.6 per cent last month.

The 10-year benchmark bond yield edged up 2 basis points to 7.57 per cent while the 30-share BSE index was largely steady, continuing to trade up 1.1 per cent, following the industrial output data.

The median forecast in a Reuters poll was for an annual rise of 13.5 per cent in April, the same pace marked in March.

Robust Consumer Demand

Manufacturing production in Asia's third-largest economy rose 19.4 per cent in April from a year earlier, while mining output was up 11.4 per cent and power generation rose 6 per cent.

Friday's data comes on the heels of an annual 8.6 per cent expansion in the economy in the quarter through March, providing another evidence of a strong rebound in an economy that is benefiting from a robust consumer demand.

Car sales in India rose an annual 30 per cent in May as rising incomes and a rapidly expanding economy offset the impact of price increases.

Manufacturing PMI accelerated at its fastest rate in more than two years in May, while the services PMI continued to remain high, suggesting the economic upswing will remain robust in coming months.

The economy is expected to grow at least 8 per cent in the current fiscal year that started on April 1, after growing 7.4 per cent last year.

But robust economic growth has also raised the prospects of capacity constraints, which are seen aggravating price pressures.

The wholesale price index, the central bank's most closely watched gauge of inflation, probably rose an annual 9.56 per cent in May, staying close to 9.59 per cent in April, according to a Reuters poll. It hit 10 per cent in February, the highest since October 2008.

The RBI described the prevailing inflationary situation as "worrisome" and has raised rates twice since mid-March and is expected to deliver another hike of 25 basis points on July 27.