Thaindian News

New Delhi, Oct 14 (IANS) With double digit industrial output figures, India’s central bank may raise rates in the first half of next year and cash reserve ratios at the end of this month, says the research arm of global rating agency Moody’s.
“With industrial output set to expand at a solid pace, the case for tighter monetary policy appears stronger than it did earlier this year,” said Nikhilesh Bhattacharyya, associate economist at Moody’s Economy.com.

Moody’s noted that the Reserve Bank of India (RBI), began to increase credit availability through a series of policy rate cuts, reductions in banks’ cash reserve ratios and increased purchases of government debt from late 2008.

“This helped to stimulate credit growth and credit availability, and supported the recovery, which is now taking place,” Bhattacharyya said.

But with consumer and business confidence restored and the output gap rapidly narrowing, the need for a highly expansionary monetary policy is fading, and concerns over inflation are rising.

“This should necessitate the Reserve Bank to begin raising rates in the first half of next year, while possibly raising banks’ cash reserve ratios at its Oct 27 meeting,” he said.

After hitting a record low of minus 0.8 percent year-on-year in March, industrial output surged in June and has expanded modestly since, booking a 23-month high of 10.4 percent in August.

“Domestic demand has been the main driver of the industrial turnaround, with surveys of purchasing managers and trade data showing external demand remains weak,” Moody’s Economy.com said.

Noting that industrial production growth looked set to accelerate in coming months, Bhattacharyya said: “Government stimulus measures are still filtering through to the real economy, and recovering consumer and business sentiment will also boost demand.”

External demand is also likely to begin to recover, he said, with consumer spending major advanced economies forecast to gradually expand over coming quarters.