India’s February industrial output growth slows

Wednesday, 13 April 2011 00:00 - - {{hitsCtrl.values.hits}}

Reuters) - India’s industrial output growth slowed unexpectedly in February, adding to evidence that its economic expansion may be moderating, but a hawkish Reserve Bank of India (RBI) is still expected to raise interest rates next month as it struggles to contain stubbornly high inflation.

The weaker-than-forecast reading of annual 3.6 percent growth in production at factories, mines and utilities compared with the median forecast for a 5.2 percent rise in a Reuters’ poll, and comes on the heels of a dip in services output in March.

Several analysts have trimmed their forecasts for Asia’s third-largest economy and have warned that high inflation combined with a tight monetary policy could drag on growth.

The Reserve Bank of India (RBI) has its eyes firmly on inflation, which at 8.31 percent in February was considerably above the RBI’s comfort level, and has indicated it would tighten policy further during the year. “Weaker-than-expected industrial production is unlikely to throw a spanner in the RBI’s way, with a 25 basis points hike at the May meeting a near certainty as inflation remains the main policy driver at this juncture,” said Radhika Rao, an economist at Forecast Pte in Singapore, referring to the RBI’s next policy review on May 3.

“Nonetheless, successive softer IP prints does warrant some attention, especially as capital goods stay under weather, while consumer durables maintain steady growth.”

February’s output growth data was lower than an upwardly revised 3.9 percent growth a month earlier. The decline was led by a contraction in capital goods output, which shrunk 1 8.4 percent in February, compared with an expansion of nearly 47 percent in the prior-year period, pointing to sluggish investment spending .

Manufacturing output, which makes up 80 percent of the overall output, grew an annual 3.5 percent during the month, compared with 16 percent a year ago.

The most-traded 7.80 percent 2021 bond yield dropped 1 basis point to 7.86 percent after the factory output data. The main share index extended losses and was down 0.6 percent from 0.4 percent before the data.