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India’s Economy Grows Most Since 2007, Adding Pressure on Rates

India’s economy expanded at the fastest pace in 2 1/2 years, increasing pressure on the central bank to extend the most aggressive round of monetary-policy tightening in Asia.

Gross domestic product rose 8.8 percent in the three months through June from a year earlier, after an 8.6 percent increase in the previous quarter, the Central Statistical Organisation said in a statement in New Delhi today. The figure matched the median estimate of 27 economists in a Bloomberg News survey.

India may be forced to raise interest rates to cool inflation even as Japan steps up its monetary stimulus and the U.S. signals it may take more steps if needed to avert another recession. Exports account for less than a fifth of India’s GDP, and rising wages and consumer spending are sheltering Asia’s third-biggest economy from a slowdown in advanced economies.

“Inflation will continue to be a challenge for policy makers in India,” Dipankar Mitra, an economist at Motilal Oswal Securities Ltd. in Mumbai, said before the report. “Though global uncertainties are increasing, India is better placed to counter them due to strong domestic demand.”

India’s $1.3 trillion economy may expand 8.5 percent in the year to March 31, the most in three years, the central bank said July 27. The benchmark wholesale-price inflation rate has hovered around or above 10 percent since January. The Reserve Bank of India said last week its priority is to rein in consumer prices.

Stocks Decline

The Bombay Stock Exchange’s Sensitive Index held its decline after the report, falling 0.8 percent at 11:17 a.m. in Mumbai. The yield on the benchmark 10-year government bonds were little changed at 7.97 percent while the rupee traded at 47.04 against the dollar.

Foreign fund inflows to Indian equities have climbed 53 percent this year compared with the same period a year earlier, making the Sensitive Index the most expensive benchmark gauge in Asia and among BRIC markets that include Brazil, Russia and China. The index trades at 17.2 times estimated profit after last year’s biggest rally in 18 years.

Bonds rose today after yields climbed last week to as much as 8.07 percent, near the highest level in four months, on concern central bank Governor Duvvuri Subbarao may raise rates for the fifth time since mid-March to slow demand. The central bank is scheduled to release its next monetary policy statement on Sept. 16.

Global Slowdown

By contrast, some of the world’s biggest economies are decelerating, adding to signs that the global recovery may be losing its momentum. Last quarter, economic growth in the U.S. slowed to a 1.6 percent annual rate, China’s expansion eased to 10.3 percent from 11.9 percent in the first quarter and Japan’s economy grew at less than a fifth the pace economists estimated.

The Bank of Japan yesterday expanded a bank-loan program, boosting its stimulus for the first time since March. Federal Reserve Chairman Ben S. Bernanke said last week his central bank has the tools to prevent the U.S. economy from slipping back into a recession, while stopping short of indicating an immediate need for further action.

In India, inflation pressures are “coming up sharply” even as the global economy has moved to a state of “less comfort,” central bank Deputy Governor Subir Gokarn said Aug. 25. Balancing the two risks while setting rates is the RBI’s challenge, he said.

India’s merchandise exports increased 13.2 percent in July, the slowest pace in six months, in a sign of the effect of world economic slowing.

‘Least Plugged-in’

“India needs to heed what happens globally as a prolonged slowdown will cut exports and impact the GDP to that extent,” Rahul Bajoria, an economist at Barclays Plc in Singapore, said before today’s report. “There is no need for concern right now as India is least plugged-in of all the emerging Asian countries” into the world economy, he said.

Bajoria expects the RBI to raise rates by a quarter-point in the next monetary policy announcement on Sept. 16.

Subbarao has lifted borrowing costs the most number of times among Asian central banks this year. The Reserve Bank’s reverse repurchase rate is 4.5 percent and the repurchase rate is 5.75 percent. Malaysia is second with three rate increases.

Companies including JK Tyre & Industries Ltd. and TVS Motor Co. are boosting capacity on optimism sufficient monsoon rains in the June-September season will spur farm output and support demand. Last year’s rains were the least since 1972.

Rural Demand

About three-fifths of India’s 1.2 billion people live in the countryside and depend on agriculture for their livelihood.

This year’s rains will help yield “bumper” harvests, Farm Minister Sharad Pawar said last month.

“Good monsoon rains will result in good harvests and boost rural demand,” Saugata Bhattacharya, an economist at Axis Bank Ltd. in Mumbai, said before the report. “Better harvests increases spending power in the countryside.”

TVS Motor, India’s third-biggest motorcycle maker, plans to spend about 2 billion rupees ($42.6 million) to add capacity this year. JK Tyre & Industries Ltd. said this month it will invest 15 billion rupees to set up a manufacturing plant for radial tires.

Salaries in India may grow an average 10.6 percent in 2010, the fastest pace in the Asia-Pacific, after increasing 6.6 percent in the previous year, according to the Lincolnshire, Illinois-based human resources adviser, Hewitt Associates Inc.

Car Shortage

Indians’ increasing wealth is causing shortages in the automobile industry, with Volkswagen AG and Hyundai Motor Co. introducing waiting lists for the first time in more than a decade amid a lack of engine castings and batteries after local component suppliers failed to anticipate a surge of more than 30 percent in car sales in the country this year.

Industrial output, which accounts for about a quarter of India’s economy, jumped 11.6 percent in the three months through June compared with 3.9 percent in the same period the previous year.

“While we are proud of our economic growth, as indeed we should be, controlling price-rise remains our top priority,” Sonia Gandhi, leader of the ruling Congress party, told her lawmakers on Aug. 19, underscoring the challenge facing the South Asian nation.

Inflation dominated the first two weeks of Parliament’s monsoon session that started on July 26, with opposition parties criticizing Prime Minister Manmohan Singh’s government for failing to check prices.