March industrial output falls, adds to wider gloom

An employee assembles a part of a BharatBenz truck inside Daimler's new factory in Oragadam, in the Kancheepuram district of Tamil Nadu April 18, 2012.

NEW DELHI (Reuters) - India's industrial output unexpectedly fell in March for the first time in five months, hit by weak investment, increasing the pressure on the RBI to cut rates further.

Industrial production shrank an annual 3.5 percent in March from a year earlier as capital goods output - an indicator of investment in the economy - slumped 21.3 percent from a year earlier, government data on Friday showed.

Analysts had expected the output growth to ease to 1.5 percent from 4.1 percent in February.

The data comes on the heels of a lacklustre performance by the exports sector in April, which is battling a slowing demand in developed economies.

Global uncertainty is clouding prospects for other Asian economies as well. China's industrial production growth weakened sharply to 9.3 percent in April, the lowest level since May 2009, as investment slowed to its lowest level in nearly a decade.

Graphic on IIP, exports link.reuters.com/gaj55s

Last month, the Reserve Bank of India lowered its main lending rate - - for the first time in three years by a sharper-than-expected 50 basis points to 8.00 percent.

Friday's data is expected to increase pressure for a further cut to spur growth, even though the bank remains concerned about inflation.

"...while remaining focused on inflation, which is always going to be the primary objective of monetary policy, we are in a situation where we have to be sensitive to the various other risks and pressures that the economy is facing," said Subir Gokarn, a deputy governor at the RBI, who handles monetary policy.

"We are in a scenario where the tendency for interest rates is going to be downwards."

India's annual economic growth probably dropped from a near 8.5 percent to sub-7 percent in the last fiscal year, which many consider to be the new trend growth rate for Asia's third-largest economy.

Financial markets took comfort from Gokarn's comments as the benchmark 10-year gilt fell 4 basis points to 8.52 percent while the benchmark stock index erased losses.

GROWTH VERSUS INFLATION

Few financial experts, however expect the RBI, which holds its next policy review on June 18, to act immediately.

"The IIP number will not lead to a knee-jerk reaction from the Reserve Bank of India. I don't think there will be a reduction in interest rates in June," said Saugata Bhattacharya, an economist at Axis Bank.

"They will wait for other indicators like inflation, and also the global crude oil prices and reform measures taken by the government before deciding on rate cuts."

After staying above 8 percent for nearly two years, the headline inflation has edged below 7 percent. It is expected to have eased a little to 6.70 percent in April from 6.89 percent in March.

Friday's data showed manufacturing output, which constitutes about 76 percent of industrial production, fell an annual 4.4 percent from a year earlier compared with a revised annual 3.9 percent growth in the previous month.

"The revival in manufacturing in the last quarter of (fiscal year) 2011-12 has not materialized as anticipated. The domestic investment recovery remains frail," Finance Minister Pranab Mukherjee said.

The rupee has depreciated almost 9 percent since March against the U.S. dollar, reflecting declining confidence in the economy, and on Thursday the central bank took regulatory measures to support the currency.

(Additional reporting by Harichandan Arakali in Bangalore and Arup Roychoudhury in NEW DElhi; Editing by Sanjeev Miglani)