NEW DELHI (Reuters) - India's industrial production grew at a slower-than-expected pace in February, weighed down by a contraction in output of consumer durable goods, reinforcing expectations the Reserve Bank of India (RBI) will cut interest rates next week to revive demand.
While the expansion in output at 4.1 percent was below the 6.6 percent estimated by analysts, the January output growth was sharply revised down to 1.14 percent from 6.8 percent on an error in sugar production data.
Though the data is notorious for its volatility, taken together with other indicators it suggests broader economic activity remains frail. Other recent data showed manufacturing growth slowed in March, while the services sector grew at its worst pace in five months.
"The lower February IIP (index of industrial production) number as well as the huge revision to January data highlights the growth concerns, and cements view of a 25 basis points rate cut from the RBI (Reserve Bank of India) next week," said Vivek Rajpal, India rate strategist at Nomura in Mumbai.
India's economy probably grew 6.9 percent in the fiscal year that ended in March, its slowest in three years as global economic uncertainty combined with high interest rates and input costs at home crimped in v estment.
The RBI is expected to cut interest rates on Tuesday for the first time in three years, lowering the policy repo rate by 25 basis points to 8.25 percent.
"We now need to see how the March inflation data comes in because if that too surprises on the downside, then we could see a 25 basis points cut along with dovish language in the statement," Rajpal said.
The headline inflation data for March is due on Monday. Inflation for the month is expected to have slowed down marginally to 6.70 percent from 6.95 percent in February, a Reuters poll showed.
Finance Minister Pranab Mukherjee blamed the "disappointing" industrial production data on an uncertain global economy and the RBI's hawkish monetary policy stance.
"These figures will have a bearing on monetary policy scheduled for next week. The government along with RBI will take steps to revive investment activity in the economy," Mukherjee said after Thursday's data.
For Graphic on IIP, exports click link.reuters.com/gaj55s
The RBI has already cut the banks' reserve requirement by 125 basis points in two moves since late January, making more money available for lending.
While federal bond yields and swap rate eased, shares extended their gains post-data as a soft industrial output number bolstered hopes of a rate cut on April 17.
"The data is much lower than expected. This seems to strengthen the case for a rate cut next week, and the markets seem to have rebounded on that expectation," said Ambareesh Baliga, chief operating officer at Way2wealth Securities in Mumbai.
Manufacturing output, which makes up about 76 percent of industrial output, grew 4.0 percent in February compared with an annual 1.4 percent growth in the previous month.
Production of consumer durable goods fell 6.7 percent in February from a year earlier, its second straight contraction, reflecting the lagged impact of the central bank's aggressive interest rate tightening in the past two years. Overall consumer goods output shrank 0.2 percent on year.
Meanwhile, capital goods production, a proxy for investment, recorded its first annual growth in six months, expanding 10.6 percent from a year earlier. However, analysts said the figure was boosted by a helpful base effect and it would be premature to read it as a rebound in investment spending.
"Corporate spending has hit a snag and will continue that way with people pushing back their capex plans," said H.M. Bharuka, managing director at Kansai Nerolac (KANE.NS) in Mumbai.
Mining production grew 2.1 percent on the year in February, recovering from six straight contractions. Electricity generation, meanwhile, rose 8 percent from a year earlier, much faster slower than the 3.2 percent rise in the previous month.
The government expects a better showing from the economy this fiscal year, and has pegged 2012/13 growth at 7.6 percent. But much would depend on capital investment that has been plagued by a policy gridlock in New Delhi and public borrowing binge.
Additional reporting by Arup Roychoudury; editing by Tony Munroe