Industry output remains weak in Feb; retail inflation slows

NEW DELHI Fri Apr 12, 2013 3:24pm IST

A worker welds a metal table at a scrap yard at an industrial area in Mumbai April 12, 2013. REUTERS/Vivek Prakash/Files

A worker welds a metal table at a scrap yard at an industrial area in Mumbai April 12, 2013.

Credit: Reuters/Vivek Prakash/Files

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NEW DELHI (Reuters) - India's industrial output barely grew in February and retail inflation edged towards single-digits in March with the first fall in six months, adding to expectations the RBI will make a cautious interest rate cut next month.

Production at factories, mines and utilities grew 0.6 percent from a year earlier, better than the 0.7 percent contraction forecast by analysts, but not enough to convince government economists that Asia's third largest economy had escaped its worst slowdown in a decade just yet.

"I'm glad it's not negative, it's very low, not anything that one can point to as indicating a robust return of growth," said Montek Singh Ahluwalia, who heads the government's main economic planning body.

February's growth was driven by a big jump in output of capital goods - a measure of investment. But economists were wary of that indicator, which has a history of volatility.

"The big increase in capital goods output contributed to the positive IIP number, but I wouldn't say the corner has turned as there is no anecdotal evidence of new projects coming up, said A Prasanna, an economist, at ICICI Securities Primary Dealership in Mumbai.

The weak industrial number keeps the pressure on the central bank to lower interest rates -- most private economists expect the Reserve Bank of India to cut by 25 basis points at its full year policy meeting in May.

But analysts said the slight drop in consumer price inflation to 10.39 percent in March was unlikely by itself to convince the bank to go much further than that to help borrowers in India, who pay some of the highest lending rates among G20 economies.

The previous month annual retail price inflation was 10.91 percent.

"More focus will be on the wholesale price data, which is out next Monday. We need to see this series easing further to raise hopes of further RBI cuts," Jonathan Cavenagh, a foreign exchange strategist with Westpac in Singapore.

India's 10-year benchmark bond yield fell 4 basis points to 7.86 percent from levels before the data as investors bet slowing consumer inflation would provide room for the central bank to cut interest rates next month.

The rupee strengthened to 54.41/42 from around 54.45/46 before the data, although the Sensex was largely unaffected, remaining down over 1 percent on the day.

STRUGGLING FOR MOMENTUM

Plagued by a combination of weak corporate investment and flagging consumer demand, the Indian economy is struggling to recover after growing at its slowest rate in a decade in the fiscal year that ended in March.

GDP growth hit a near four-year low of 4.5 percent in the quarter to end-December, a new low for an economy also battling stubborn inflation and a record current account deficit.

The economy is struggling to regain momentum despite a series of economic reforms since last year aimed at reviving investor sentiment. And India has been hard hit by weak demand for its goods and services abroad.

Car sales -- a proxy for domestic consumer demand -- fell for the fifth straight month in March. The overall fall in 2012/13 was the first in a decade, and with consumer demand expected to remain tepid, carmakers are braced for more gloom.

Weak global demand and regulatory hurdles at home dragged down growth in manufacturing and service sectors to their lowest levels in March since late 2011.

To pull the economy out of the slump, the Reserve Bank of India lowered its benchmark policy rates by 25 basis points last month for the second time this year.

But high inflation and rising bad loans at Indian banks are handicapping the central bank's efforts to boost lacklustre domestic demand.

Persistently high consumer prices are seen driving up household inflationary expectations and threatening to feed into the broader economy by bringing pressure for higher wages.

Inflation is also pushing up gold imports, due to buyers seeking a hedge against paper money, and adding to the current account deficit.

The current account deficit hit an all-time high of 6.7 percent of GDP in the December quarter on heavy oil and gold imports and muted exports, increasing India's reliance on volatile capital inflows to fund the shortfall.

(Reporting Delhi and Mumbai bureaux; Editing by SImon Cameron-Moore)

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