New Delhi: India clocked annual growth in the January-March quarter of 9.3 per cent, which analysts said strengthened the case for higher interest rates but may not turn the tide for its falling markets.
The expansion rate in the fourth quarter of India's financial year, which runs from April to March, was higher than the revised October-December rate of 7.5 per cent and above analysts' forecast for 7.8 per cent annual growth in gross domestic product.
"The view that interest rates should rise gets reinforced on the back of the current growth data," said Amogh Deshpande, senior analyst at Securities Trading Corp of India. "(A) further increase in rates will not impede growth, though inflation in asset prices remain a matter of concern."
"India has a large current account deficit and although the GDP numbers were better than expected, this will exacerbate the current account deficit," said Callum Henderson, head of currency strategy at Standard Chartered.
The central bank next reviews interest rates on July 25, and analysts say an expected increase this week in government-capped retail fuel prices as well as the rapid economic expansion make a 25 basis point rise in the benchmark short-term rate to 5.75 per cent highly likely.
The benchmark stock index, which has taken a pummelling in a recent sell-off in Asian stock markets, has fallen about 20 per cent from a May 11 record high and a rise in interest rates could hurt corporate profits, analysts say.
"The GDP growth is a pleasant surprise," said Andrew Holland, executive vice-president of research at DSP Merrill Lynch.
"But the markets have already factored this in and right now investors are more concerned about the falling rupee, which could push up interest rates."
The surprise in the data was the gain in farm output. Agriculture which accounts for a fifth of GDP grew an annual 5.5 per cent in the January-March quarter, compared with a downwardly revised 2.9 per cent in the previous quarter.
Manufacturing output, which accounts for nearly 15 per cent of GDP, expanded 8.9 per cent, faster than a revised annual growth rate of 8.3 per cent in October-December. Services, which constitute about 54 per cent of GDP, grew 9.6 per cent in Jan-March, maintaining strong momentum of the past two years.
Full-year GDP growth for 2005-06 was revised to 8.4 per cent from a previous estimate of 8.1 per cent.
Right conditions needed: minister
India needs to strengthen its economy and insulate it from shocks created by market volatility before it can move to greater capital account convertibility, junior finance minister Pawan Kumar Bansal said yesterday.
A six-member central bank panel is currently looking at a proposal by Prime Minister Manmohan Singh to move to greater capital account convertibility and is due to unveil a roadmap by the end of July.
"What is needed is to strengthen the Indian economy and insulate it from the shocks of volatility in stock markets and foreign exchange market... We have to create conditions congenial for that," Bansal said at a business conference.
- Reuters