UPDATE 2-Indian industrial growth slows; latest sign of weakness

Fri Jun 10, 2011 2:50pm IST

* April industrial output up 6.3 pct y/y

* April manufacturing output grows 6.9 pct y/y

* Cbank seen hiking rate next week

* Slowing economy seen tempering pace of rate tightening (Adds details, background)

By Rajesh Kumar Singh

NEW DELHI, June 10 (Reuters) - India's industrial output growth dipped in April, the latest sign that rising cost of credit and inflation are acting as brakes on the economy, which may compel the central bank to pull back from its aggressive monetary policy tightening.

The annual 6.3 percent expansion in production at factories, mines and utilities compares with 8.8 percent in March and was the slowest in three months. Friday's data was the first of a new series with a base year of 2004-05, new components and weightings.

Under the old series, annual industrial output growth in April was 4.4 percent, lower than an upwardly revised 7.8 percent growth in March and below a median forecast of 5.5 percent expansion in a Reuters poll.

The industrial output data adds to evidence pointing to a slowdown in Asia's third largest economy, which grew at an unexpectedly modest 7.8 percent in the three months through March, its slowest in five quarters.

Growth in big emerging economies like India and China is cooling at the same time recoveries are stalling in the United States and Europe.

"While the market has two sets of data points to look at, there is no change in the industrial slowdown story," said Anubhuti Sahay, an economist at Standard Chartered in Mumbai.

Both the old and new data series showed a slowdown in manufacturing, which contributes about 80 percent to overall industrial output. Under the new series, manufacturing grew an annual 6.9 percent compared with 10.4 percent a month earlier, while under the old series growth slowed to 4.4 percent from 8.4 percent in March.

A moderation in India's manufacturing PMI in May on weak demand suggests expansion in the sector will remain subdued in coming months.

"Higher borrowing costs, tighter credit-vigilance and rising input prices are likely to hinder production activity going forward," said Radhika Rao, an economist at Forecast PTE in Singapore.

Even as India's economy cools, elevated inflation is expected to keep the central bank hawkish. Most economists still expect the central bank to raise its main policy rate by 25 basis points at its policy review next week, after it raised rates by a bigger-than-expected 50 basis points last month.

TIGHTENING TO CONTINUE -- FOR NOW

"Overall, the RBI (Reserve Bank of India) is unlikely to pull the plug on the rate-tightening agenda in reaction to sluggish factory outcomes, though the releases do lower the scope for aggressive rate hikes in the coming months," Rao said.

Capital goods output grew an annual 14.5 percent in April. Growth in production of consumer durable goods including cars slumped to 3.8 percent from almost 14 percent a month earlier as higher credit costs and fuel prices crimped demand.

High inflation and rising interest rates also weighed on consumer goods production, which grew just 2.9 percent compared with almost 12 percent growth in March.

The yield on the most-traded 7.80 percent 2021 bond eased 1 basis point to 8.26 percent after the industrial output data release.

The 5-year overnight indexed swap rate fell 2 basis points 7.70 percent and the 1-year fell 4 basis points to 7.86 percent after the data.

The central bank has raised its policy rate by a total of 250 basis points in nine moves since March 2010. But its rate tightening moves have failed to bring headline inflation, which was 8.66 percent in April, to its comfort zone of 4-5 percent.

Although the RBI said last month it was ready to compromise on growth in the short term to control inflation, a sharper-than-expected slowdown in the economy has tempered expectations about the pace of rate tightening for the rest of 2011.

"This (IIP data) combined with the easing of PMI and a fall in the order books of several firms would compel the RBI to go back to its calibrated approach," said Rupa Rege Nitsure, chief economist at Bank of Baroda in Mumbai.

Car sales in May rose at their slowest pace in two years, and analysts predict further slowdown in the second-fastest growing vehicle market.

The services sector, which makes up little over half of India's GDP, expanded at its slowest pace in 20 months in May, hit by rising prices and interest rate hikes.

Recent PMI data show input prices outpacing output prices, suggesting manufacturers are struggling to pass on rising costs to consumers. Business confidence in May sunk to its lowest level since July 2010. (Editing by Tony Munroe and Ramya Venugopal)

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