India looks to axe stimulus measures

India's central bank may withdraw more stimulus measures by the end of the year after Asia's third-biggest economy grew at the fastest pace in six quarters.

"The chances of a rate move before the end of December have risen," said Robert Prior-Wandesforde, senior Asia economist at HSBC in Singapore. Economic growth of 7.9 per cent last quarter was an "extraordinary" number that "will no doubt make the Reserve Bank of India sit up and take notice", he said.

Governor Duvvuri Subbarao, concerned about inflation gaining traction, last week indicated that there was a need to exit some of the "unconventional" measures used to spur growth. Australia and Vietnam have already begun to tighten monetary policy as the Asia Pacific region leads the world out of the worst recession since the 1930s.

India's US$1.2 trillion economy may grow about 7 per cent in the year to March 31, Finance Minister Pranab Mukherjee said on Monday after the statistics bureau released gross domestic product figures for the quarter ended September 30.

Subbarao in October predicted growth this fiscal year of 6 per cent "with an upward bias".

The benchmark Sensitive index gained 1.8 per cent to 16,926.22 after the GDP report and the rupee increased 0.3 per cent to 46.5157 per dollar. The yield on the benchmark 10-year government bond rose 7 basis points to 7.26 per cent.

Growth in India is benefiting from record-low interest rates, tax cuts and higher government spending unveiled by policymakers since September 2008 to shield the economy from the global slump. The combined stimulus is worth more than 12 per cent of GDP.

While Subbarao started to withdraw monetary stimulus in October by ordering lenders to keep aside a greater proportion of deposits in government bonds, he has kept the benchmark reverse repurchase rate unchanged at 3.25 per cent since April.

Inflation pressures are building as growth quickens and after the weakest monsoon rains since 1972 hurt farm output, pushing up food costs.

The central bank forecasts inflation of 6.5 per cent by March 31 from 1.34 per cent in October and 0.5 per cent in September.

Macquarie Group economist Rajeev Malik expects Subbarao to raise the cash reserve ratio, or the proportion of deposits lenders keep with the central bank as cash reserves, as early as this month before increasing interest rates.

Mukherjee said last month he will take "corrective" steps and pull back fiscal stimulus once economic recovery takes hold.

That stage may not have been reached, as the central bank Deputy Governor Subir Gokarn yesterday said the unexpected increase in India's economic growth may be on account of the Government stimulus and that it was "premature" to say the economy can grow 7 per cent in the current financial year.

Montek Singh Ahluwalia, deputy chairman of India's Planning Commission, the Government's economic advisory arm, said the growth numbers suggest that policies were working and that there was no need to change them at present. Inflation was not a "big problem" at the moment, he said yesterday.

"We are still about two quarters away from rate hikes per se but the central bank might start withdrawing liquidity through an increase in its regulatory reserve requirements," said Gaurav Kapur, an economist at ABN Amro Bank in Mumbai.

"While there is some improvement in private consumption, investment activity still remains a laggard."

Companies including JSW Steel India's third-largest producer, said it is "not very clear" whether the economy would expand at the same pace in the current quarter.

Growth in construction and real estate has been subdued since October.

Still, the economic expansion in India is the fastest after China among the world's biggest economies, attracting investments from French tire maker Michelin and South Korea's Samsung.

Michelin said this month it plans to invest 40 billion rupees in a new factory in the southern Indian state of Tamil Nadu.

Samsung has inaugurated an air-conditioner manufacturing unit in India.

- BLOOMBERG