NEW DELHI: India's industrial output unexpectedly fell in March for the first time in five months, driven by a slump in the capital goods sector, and increasing the pressure on policymakers to consider further steps to revive a sagging economy.
Annual production at factories, mines and utilities shrank 3.5 per cent in March from a year earlier, government data showed on Friday.
Analysts had expected the output to grow 1.5 per cent, a Reuters poll showed. The March figure compares with February's annual rise of 4.1 per cent.
“Concern over economic growth has increased after the dismal IIP (index of industrial production) data, and it should prompt the RBI (Reserve Bank of India) to go for a further reduction in interest rates from June,” said Arun Singh, a senior economist at Dun & Bradstreet in Mumbai.
“I see another 100 basis points cut in the repo rate by March 2013.”
Persistent supply bottlenecks in sectors such as energy, infrastructure, minerals and labour have shaved off India's growth potential, seen in recent years as one of the drivers of the world economy.
Annual economic growth probably dropped from a near 8.5 per cent to sub-seven per cent in the last fiscal year, which many consider to be the new trend growth rate for Asia's third-largest economy.
Capital goods production, an indicator of investment in the economy, s lumped 21.3 per cent from a year earlier, data on Friday showed.
To revive the economy, the central bank lowered its main lending rate—for the first time in three years by a sharper-than-expected 50 basis points to eight per cent last month.
Stocks, rupee down
But few believe rate cuts alone could shore up growth prospects. The central bank itself has been advocating the removal of supply bottlenecks to help the economy grow at a faster clip without stoking inflation.
Federal bond yields and the rupee fell after the data, while shares extended their losses.
The benchmark stock index extended its fall to 0.9 per cent after the data, while the rupee dropped to an intra-day low of 53.61 to the dollar. The 10-year bond yield fell 2 basis points to 8.54 per cent.
“The data increases the odds of another rate cut, is negative for the INR, and should push INR OIS rates and bond yields down,” said Dariusz Kowalczyk, an economist at Credit Agricole CIB in Hong Kong.
A two-year long struggle against high inflation forced the Reserve Bank of India (RBI) to raise interest rates by 375 basis points between 2010 and 2011. Although the headline inflation has moderated below seven per cent, the central bank expects a “challenging” scenario going ahead.
Policy flip-flops are not helping either. A recent government move to check tax evasion led to a flight of foreign capital from domestic financial markets, plunging the rupee.
The currency has depreciated almost nine per cent since March against the US dollar and on Thursday the central bank took regulatory measures to support the rupee.
The government has since deferred the tax measure.
Friday's data showed that manufacturing output, which constitutes about 76 per cent of industrial production, fell an annual 4. 4 per cent from a year earlier compared with a revised annual 3.9 per cent growth in the previous month.
Mining production shrank 1.3 per cent in March from a year earlier as regulatory hurdles including environment hobbled investment in the sector.
Electricity generation rose 2.7 per cent from a year earlier, much slower than the eight per cent rise in the previous month.
