Reuters-Rajesh Kumar Singh
"India's industrial output growth slumped to its lowest in nearly two years in July as high interest rates crimped Asia's third largest economy, putting pressure on the Reserve Bank of India (RBI) to pause its monetary tightening even with a stubbornly high inflation.
The RBI is still expected to raise rates at its Friday policy review, especially if August inflation data due on Wednesday touches double-digits, as expected by some analysts.
"Inflation is going to be very close to 10 percent (for the month of August)," the chief economic adviser to the finance ministry, Kaushik Basu, said on Monday. "We are expecting inflation to remain very difficult till the month of November, maybe December and then begin to slow down."
Basu said the country was balancing between two very difficult problems - high inflation and slowdown in growth. "The RBI will have to balance these out and take a decision on it."
The data adds pressure on the central bank to end its monetary tightening that began in March 2010 after recent indicators showed slower factory output and a sharp drop in car sales.
Renewed woes about the weakening global economy and risks to growth, combined with euro zone's debt hurdles and the grim outlook in the U.S., have added to domestic concerns for Indian policymakers.
"For the RBI's monetary policy stance, inflation for August due on Sept. 14 will carry more weight than today's IIP numbers," said Rupa Rege Nitsure, Chief Economist of Bank Of Baroda in Mumbai. "I think inflation will be close to double digits."
India's headline inflation was 9.22 percent in July.
"Our base view is for a 25 bps rate hike by the RBI this week. But the probability of a pause has increased due to global uncertainty," said Kumar Rachapudi, fixed income strategist at Barclays Capital in Singapore.
Industrial output rose just 3.3 percent in July, dragged down by a 15 percent annual decline in capital goods production from a 38 percent growth a month earlier, government data showed.
The factory output figure was well below a median forecast of 6.2 percent in a Reuters poll.
The BSE Sensex extended losses to more than 2 percent and the rupee weakened to its lowest in more than a year on Monday after the data was published.
India's 5-year swap rate fell 6 bps to 6.59 percent from before the data and 1-year rate fell 4 bps to 7.51 percent. The 10-year benchmark bond yield fell 1bp to 8.26 percent.
For a graph on IIP, click here link.reuters.com/waw63s
Production of consumer goods and consumer durables rose compared to June, indicating consumer demand is still holding up somewhat in the face of rising interest rates.
Some cautioned that such high volatility raised doubts about the reliability of the data.
"We think that this data cannot be a credible guide to RBI policy. Inflation will continue to hold the key for the September rate decision," said A. Prasanna, an economist with ICICI Securities Primary Dealership in Mumbai.
Manufacturing output , which constitutes about 76 percent of the industrial production index, rose an annual 2.3 percent, the federal statistics office said in a statement.
Weakness in the west is taking a global toll on manufacturing. South Korea's manufacturing sector shrank in August for the first time in 10 months as new export orders decreased, while China's manufacturing contracted slightly for the second consecutive month."
"India's industrial output growth slumped to its lowest in nearly two years in July as high interest rates crimped Asia's third largest economy, putting pressure on the Reserve Bank of India (RBI) to pause its monetary tightening even with a stubbornly high inflation.
The RBI is still expected to raise rates at its Friday policy review, especially if August inflation data due on Wednesday touches double-digits, as expected by some analysts.
"Inflation is going to be very close to 10 percent (for the month of August)," the chief economic adviser to the finance ministry, Kaushik Basu, said on Monday. "We are expecting inflation to remain very difficult till the month of November, maybe December and then begin to slow down."
Basu said the country was balancing between two very difficult problems - high inflation and slowdown in growth. "The RBI will have to balance these out and take a decision on it."
The data adds pressure on the central bank to end its monetary tightening that began in March 2010 after recent indicators showed slower factory output and a sharp drop in car sales.
Renewed woes about the weakening global economy and risks to growth, combined with euro zone's debt hurdles and the grim outlook in the U.S., have added to domestic concerns for Indian policymakers.
"For the RBI's monetary policy stance, inflation for August due on Sept. 14 will carry more weight than today's IIP numbers," said Rupa Rege Nitsure, Chief Economist of Bank Of Baroda in Mumbai. "I think inflation will be close to double digits."
India's headline inflation was 9.22 percent in July.
"Our base view is for a 25 bps rate hike by the RBI this week. But the probability of a pause has increased due to global uncertainty," said Kumar Rachapudi, fixed income strategist at Barclays Capital in Singapore.
Industrial output rose just 3.3 percent in July, dragged down by a 15 percent annual decline in capital goods production from a 38 percent growth a month earlier, government data showed.
The factory output figure was well below a median forecast of 6.2 percent in a Reuters poll.
The BSE Sensex extended losses to more than 2 percent and the rupee weakened to its lowest in more than a year on Monday after the data was published.
India's 5-year swap rate fell 6 bps to 6.59 percent from before the data and 1-year rate fell 4 bps to 7.51 percent. The 10-year benchmark bond yield fell 1bp to 8.26 percent.
For a graph on IIP, click here link.reuters.com/waw63s
Production of consumer goods and consumer durables rose compared to June, indicating consumer demand is still holding up somewhat in the face of rising interest rates.
Some cautioned that such high volatility raised doubts about the reliability of the data.
"We think that this data cannot be a credible guide to RBI policy. Inflation will continue to hold the key for the September rate decision," said A. Prasanna, an economist with ICICI Securities Primary Dealership in Mumbai.
Manufacturing output , which constitutes about 76 percent of the industrial production index, rose an annual 2.3 percent, the federal statistics office said in a statement.
Weakness in the west is taking a global toll on manufacturing. South Korea's manufacturing sector shrank in August for the first time in 10 months as new export orders decreased, while China's manufacturing contracted slightly for the second consecutive month."
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