UPDATE 1-India's industrial output growth slows down in February

Mon Apr 11, 2011 12:08pm IST

* Feb industrial output up 3.6 pct y/y, below f'cast

* Feb manufacturing growth 3.5 pct y/y

* Capital goods sector continues contraction in Feb

* Cbank seen hiking rates on May 3 on inflation woes

By C.J. Kuncheria and Manoj Kumar

NEW DELHI, April 11 (Reuters) - India's industrial output grew at a slower-than-expected pace in February, dragged down by continued contraction in capital goods, but a hawkish central bank is still expected to tighten monetary policy as it battles stubbornly high inflation.

Production at factories, mines and utilities grew 3.6 percent on year in February, lower than an upwardly revised 3.9 percent growth a month ago and below the median forecast for a 5.2 percent rise in a Reuters' poll.

The manufacturing sector, which contributes about 80 percent to overall output, grew an annual 3.5 percent in February. Capital goods output fell 18.4 percent during the month compared with an almost 47 percent growth in the same period last year.

"Weaker-than-expected Feb industrial production is unlikely to throw a spanner in RBI's (Reserve Bank of India) way, with a 25 basis points hike at the May meet a near certainty as inflation remains the main policy driver at this juncture," said Radhika Rao, an economist at Forecast Pte in Singapore.

Economists and bond traders expect the central bank to raise benchmark short-term interest rates by 25 basis points at the next monetary policy review, scheduled on May 3.

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 to be down 0.6 percent from 0.4 percent beforehand.

The partially convertible rupee too extended losses marginally to 44.21 per dollar from 44.19.

India's domestically driven economy, is expected to have grown 8.6 percent in the fiscal year that ended on March 31 and the government has forecast it to grow 9 percent in the current fiscal year.

But several private economists are predicting a slowdown in the economy and have cut down their growth forecast for the current fiscal year, citing rising interest rates and high inflation.

A HSBC survey last week showed growth in India's service sector slowed in March from February's blistering seven-month high as new business growth moderated slightly, while price pressures, particularly wages, continued to rise. [ID:nBMA009650]

A survey of manufacturers in Asia's third largest economy showed input cost in March rose to its highest level since the poll was started in April 2005, driven by surging raw material and crude oil prices.

Economists fear supply bottlenecks and further gains in oil prices CLc1 could push India's inflation further up from an annual reading of 8.3 percent in February.

Subir Gokarn, a deputy governor at the Reserve Bank of India (RBI), last week said high economic growth was contributing to high inflation, but added the central bank cannot afford to be slack on inflation, boosting expectations of another rate hike at its next policy review in early May. [ID:nL3E7F50W9]

The RBI has raised rates eight times since March 2010, warning of inflationary pressures and emerging risks to growth. (Writing by Rajesh Kumar Singh)

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