Industrial output growth slows sharply in December

NEW DELHI (Reuters) - Indian industrial production growth slowed sharply in December as capital investment remained weak, adding to pressure on the RBI to start cutting interest rates to help stimulate an economy that is headed for its slowest growth in three years.

Output from India's factories, mines and utilities increased 1.8 percent from a year earlier, the slowest since October.

Economists had expected an increase of 3.4 percent, a Reuters poll showed. The December figure compares with a rise of 5.95 percent in November.

Industrial production growth has been slowing for two years on a sequential basis, the 3-month moving average of the data shows, and that momentum is now at its slowest since mid-2009

"The investment cycle has been hit and that story is still continuing; today's data is a reminder of the fact that we need some policy action to boost investment," said Anubhuti Sahay, senior economist at Standard Chartered Bank in Mumbai

"But this doesn't change the growth outlook for the year, or monetary policy expectations. The central bank will likely go by inflation data to decide on the timing of a rate cut."

The government, which released its growth estimates for the fiscal year ending March 31 earlier this week, cut its growth forecast to a three-year low of 6.9 percent.

Growth in the Indian economy, which grew 8.4 percent in the year to March 2011, has been slowing as the euro zone crisis, the central bank's tight monetary policy, and government policy paralysis discourages investment.

Government bond yields slipped, stock prices turned negative and the rupee weakened after the data was released.

Manufacturing output, which constitutes about 76 percent to industrial output, grew 1.8 percent in December.

Mining production shrank 3.7 percent from a year earlier, its fifth straight contraction, reflecting a host of regulatory and environmental approval issues plaguing the sector.

Electricity generation rose 9.1 percent from a year earlier, slower than a 14.6 percent rise in the previous month.

The data showed that investment remains anaemic. Capital goods production, a proxy for investment, shrank for the fourth straight month, contracting 16.5 percent from a year earlier.

PRESSURE ON RBI

With the cash-strapped government left with little fiscal headroom to encourage growth, the onus is on the Reserve Bank of India (RBI) to prop up the economy.

"Growth impulses are expected to remain weak through the next financial year. And along with the expected easing in inflation should provide the setting for RBI to cut rates." said Ashutosh Datar, an economist at IIFL in Mumbai.

The RBI is widely expected to begin cutting interest rates in the quarter beginning April 1 after a 20-month tightening cycle that ended in October last year.

Economists expect 100 basis points of cuts from the current 8.5 percent in 2012, beginning with 50 basis points of cuts in the April-June quarter.

There are also some early positive signs on the economy.

India's manufacturing sector bucked the gloomy global trend, posting its strongest expansion in eight months in January, a survey of purchasing managers showed. Services grew at their fastest pace in six months.

Still, inflationary risks persist. Although the headline inflation, which slowed to a two-year low of 7.47 percent in December, is showing signs of peaking, non-food manufactured inflation, or core inflation, at 7.7 percent remains way above the central bank's comfort zone.

"The RBI will prefer to wait till it believes it has complete control over inflationary expectations," said Arun Singh, senior economist at Dun & Bradstreet in Mumbai.

(Editing by Ramya Venugopal and Malini Menon)