Growth in manufacturing forces RBI to hike rates

Rapid growth in manufacturing and services will put pressure on the Reserve Bank to hike key policy rates at its next meeting in April or even before that, says the research arm of the global rating agency Moody's.

"Solid performance in manufacturing and services will increase pressure on the Reserve Bank to hike interest rates," said Moody's Economy.com associate economist Nikhilesh Bhattacharyya in a statement on Thursday.

Manufacturing and services appear to be growing at an above-trend rate, Bhattacharyya said, adding the purchasing managers' indices (PMI) for manufacturing and services are consistent with rapid growth in both sectors in February.

The RBI has resisted calls to raise rates in response to a decade-high consumer price inflation, which has been driven almost exclusively by supply-side factors, he said. However, there is now demand-side pressures also on inflation, Bhattacharyya warned.

"The demand-side price pressures are undoubtedly rising, as private demand has rapidly recovered," he noted.

"With PMI data indicating manufacturing and services are enjoying rapid growth, the RBI looks almost certain to raise rates at its next scheduled meeting in April, if not opting for an inter-meeting move before," Bhattacharyya said.

The rapid recovery in manufacturing and services helped offset the downturn in agricultural production, which declined during the third quarter degrew by 2.8 per cent following drought and deficient monsoons in 2009.

"Provided this year's monsoon is normal, real GDP growth in the range of 7 per cent to 9 per cent is likely," he said.