Strong IIP growth will add to inflationary pressures: Moody's

Spike in industrial production at 17.6 per cent in April will add to inflationary pressures and may prompt the Reserve Bank to tighten money supply ahead of its monetary review scheduled for next month, global ratings firm Moody's said today.

The unexpected rise in capital goods production, which was the main driver of the growth, suggests that a surge in business investment may accelerate further and add to inflationary pressures, said Moody's Analytics, the research arm of Moody's.

Manufacturing, which accounts for around 80 per cent of the Index of Industrial Production (IIP), expanded by 19.4 per cent in April, with capital goods growing by 72.8 per cent and consumer durables by 37 per cent.

"The spike in industrial production will increase pressure on RBI to quicken the thus far gradual pace of policy rate hikes," Moody's Analytics said.

Inflation has been a concern for the government and policy makers for the past several months, with the April figure hovering at 9.59 per cent. Food inflation, on the other hand, was 16.74 per cent for the week ended May 29, 2010.

To contain the rise in prices, RBI has been tightening policy rates since January, against the backdrop of recovery in the economy which slowdown after the global slump in 2008.

Moody's said RBI has been wary of aggressively hiking rates so far because the rise in prices over the past few months has been driven mainly by supply-side factors.

"However, with industrial production growing at a stronger than expected pace and credit growth beginning to pick up in recent months, the chance of an inter-meeting rate hike by RBI has increased," Moody's added.

It said that over the coming quarters, industrial production is expected to decelerate as spike in capital goods production is unsustainable and will wane as interest rates rise.