July 2010 IIP snapshot

India's industrial output beat analysts’ expectations by a huge margin in July, strengthening the case for further monetary tightening ahead of next week’s crucial monetary policy review.Industrial production expanded 13.8% during the month, compared with 5.8% growth in June. Most polls had predicted a 7-8% growth in the index of industrial production in July. The central bank has the difficult task of tackling high inflation without upsetting the growth momentum in the economy amid doubts about the global recovery. It had hiked policy rates four times this year to a combined one percentage point. RBI is under pressure to raise rates further to bring down sticky food inflation that continues to be in double digits despite a good monsoon and prospects of a bumper harvest. Food inflation stood at 11.5% in the week ended August 28. Many economists expect RBI to raise policy rates by 25 basis points in its September 16 review. The government expects the economy to expand 8.5% in the current fiscal year. Industrial output recorded double-digit growth from October 2009 to May 2010. It has been showing a declining trend since January and posted dismal figures for June, leading analysts to believe that Reserve Bank of India would slow its monetary tightening. The growth in capital goods output has come as a surprise for most analysts.

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