Reserve Bank of India needs to hike rates: HSBC

A cooling manufacturing growth does not eliminate the need to hike interest rates in India as growth momentum is still strong and tight cash conditions should not limit policy moves, HSBC said in a note on Thursday.

Indian manufacturing growth cooled in June after a surge in activity the prior month, mainly due to slowing production and rapidly easing input price pressures, a survey showed on Thursday. 

"Growth momentum remains strong in India, with consumption and services picking up speed, even as manufacturing slows because of a fading policy stimulus," HSBC economist Frederic Neumann wrote.  

"Manufacturing is hitting a plateau at high levels but isn't knocked out just yet," he added.

HSBC expects the central bank to hike key rates by 50 basis points in the July 27 policy review.                                           

It expects the recent fuel price hike to keep inflation firm for longer but sees it easing to 4 percent year-on-year by December and average at 8 percent in 2010 from an earlier expectation of 8.5 percent. 

"Good monsoons, private capex implementation and the government's spending on infrastructure will continue to keep factories running. The strong demand outlook and tight current capacity should worry the RBI enough to cool demand growth," HSBC said.

"Mis-timing policy tightening could leave policy measures ineffective in curbing demand pull inflation."