The Reserve Bank of India (RBI) is set to raise interest rates this week for the fifth time in six months, but the country's booming stock market is widely expected to shrug off the spat and push ahead as factories brim with activity to feed robust festive demand in the coming two months.
Consumers in a large swathe of India traditionally spend the most in the run up to Diwali, the festival of lights that falls in early November.
It is also the time when most state governments and companies give annual bonuses to employees, spurring demand for cars and motorcycles, consumer durables, textiles and gold.
Rally
With the four-month annual monsoon also coming to an end in September, construction activity will pick up boosting sales of steel and cement, and producers have already begun raising prices.
"Expect a rally to unfold, especially in capital goods stocks," said equity trader Anmol Bhushan. "The data was a complete surprise and underscores the strength of the economy. It is a shot in the arm for the bulls."
On Friday, when the market was closed for Eid Al Fitr, official data showed industrial output in July galloped an annual 13.8 per cent, the fastest pace since April and sharply up from a downwardly revised 5.76 per cent in June. The latest figure was almost double the street estimate, and was driven by manufacturing that expanded 15 per cent.
The government data showed output of capital goods like construction and earth-moving equipment jumped an annual 63 per cent in July, while consumer durables production surged 22.1 per cent and consumer goods output grew 6.7 per cent.
"This is such a large deviation from the trend that it could potentially have an impact on all growth projections for the year," said Samiran Chakraborty, chief economist at Standard Chartered Bank.
The data will reinforce expectations for the RBI to raise rates on Thursday when it reviews policy. The central bank has increased its main lending rate by 100 basis points since mid-March to rein in high inflation, and bond traders have been pricing in another 50 basis points rise this year.
"Indian policy-makers will remain firmly focused on dealing with inflation rather than any concerns about the potential impact of weaker global growth," said Brian Jackson, senior emerging markets strategist at Royal Bank of Canada in Hong Kong, who expects the RBI to raise rates on Thursday.
Bhushan said investors have already discounted a rate increase and the focus will be on the rapid growth in output. Indeed the July factory data raises the prospect of the economy beating the government's forecast of 8.5 per cent for the full year.
"There is a good case for the government to marginally increase its economic growth target for the current fiscal year," Montek Singh Ahluwalia, deputy chairman of the Planning Commission, said after the data was released.
Other indications showed growth in August could be robust. The Society of Indian Automobile Manufacturers said car sales last month jumped a third from a year earlier to 160,794 units — the most for any month ever. The HSBC Markit Purchasing Managers' Index, based on surveys of 500 companies in India, had showed the manufacturing sector expanded at a strong pace of 57.25 in August, slightly slower than 57.6 in July, but well above 50 that indicates expansion.
The top-30 Sensex rallied 3.2 per cent last week, the biggest weekly rise in six months, to 18,799.66, its best close since early 2008.
"There is a good chance of hitting 20,000 by Diwali," said Bhushan. "More foreigners are buying into the India story, and that's a big bullish signal."
Foreign funds bought shares worth $13.6 billion since the start of January, data from the Securities and Exchange Board of India showed, on track to meet or exceed last year's $17.6 billion record inflow.
Private equity investments in August soared more than seven-fold to $1.3 billion from $179 million in the same month last year, research firm VC-CEdge said.
The industrial sector drew $309 million, followed by telecoms with $304 million in investment and finance at $298 million, it said.
The writer is a journalist based in India
