India July industry output flags underlying strength

By Surojit Gupta

NEW DELHI (Reuters) - India's industrial output rose more than expected in July, driven by capital goods production, suggesting the economy was resilient enough to withstand another rate rise if inflation made more tightening necessary.

Industrial production rose 7.1 percent in July from a year earlier, beating a forecast of 6.5 percent and pulling up from drop in pace in May and June, data showed on Friday.

Industrial output is geared mostly to the domestic market, accounting for about a fifth of gross domestic product, and economists said a 21.9 percent jump in capital goods production from a year ago suggested an encouraging level of investment.

The Reserve Bank of India (RBI) raised interest rates three times in June and July as inflation moved into double digits, and economists said the mild recovery in industrial activity gave it scope to act again if inflation failed to slow sufficiently.

"Given the recent trend as far as manufacturing prices inflation is concerned there is still scope for RBI to go with that one last hike in October," said Rajeev Malik, head of Indian and ASEAN economics at Macquarie Capital Securities.

Bond yields fell slightly after the data with the market looking past the figures to an auction later in day. The rupee inched up to 45.7150/7250 per dollar and the main stock index trimmed losses.

The Reserve Bank of India (RBI) lifted its key lending rate, the repo rate, to 9.0 percent at the end of July, its highest in seven years.

Since then annual inflation has moderated from a high of 12.6 percent in early August to 12.1 percent by the end of that month, but some economists say it has still to peak at 13-14 percent and won't dip into single figures until early next year.