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July Industrial Growth Falls To 2-year-low

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Growth in India's industrial output in July slumped to its lowest in nearly two years as high interest rates cooled Asia's third largest economy and put pressure on the Reserve Bank of India to pause its monetary tightening despite stubbornly high inflation.

Despite the weak data, the RBI is still expected to raise rates at its Friday policy review.

"We expect the RBI to persevere with a 25 bps hike on Friday though the trajectory thereafter will hinge on the inflation trend in the coming months," said Rashika Rao, an economist with Forecast Pte in Singapore.

Industrial output rose just 3.3 per cent in July, dragged down by a huge fall in capital goods production.

The data was well below a median forecast of 6.2 per cent in a Reuters poll, government data showed on Monday.

The BSE Sensex extended losses to more than 2 per cent and the rupee weakened to its lowest in more than a year on Monday after the data was published.

The slowdown was driven by a drop in capital goods production from 38.2 per cent growth last month to a 15.2 per cent contraction this month and a smaller drop in manufacturing.

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 per cent of the industrial production index, rose an annual 2.3 per cent, the federal statistics office said in a statement.

With headline inflation at 9.22 per cent in July the RBI is expected to raise rates on Friday for the 12th time since March 2010. August inflation data will be released on Wednesday.

Euro zone debt woes and a weak outlook for the U.S. economy have added to home-grown headaches for Indian policymakers.

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.

Market Reaction
The BSE Sensex extended losses to more than 2 per cent after the data.

The partially convertible rupee weakened past 47 to a dollar to 47.0050, a level last seen on Aug. 31, 2010.

Background:



  • The industrial output data, along with August inflation on Wednesday, will set the ground for the Reserve Bank of India's (RBI) rate decision meeting on Friday.

  • A Reuters poll of 18 economists released before the data on Monday forecast the RBI would deliver the last rate increase in its 18-month-long tightening cycle on Friday as inflation pressures continue to remain strong.

  • The RBI, which has raised rates 11 times since mid-March 2010, remains bent on fighting inflation despite weakening global conditions, officials with direct knowledge of policymaking said last week.

  • Rising borrowing costs have dented consumer spending and hurt growth. The economy expanded 7.7 per cent in April-June, its weakest pace in six quarters but outperformed even gloomier predictions.

  • The HSBC Markit Purchasing Managers' Index fell to 52.6 in August, the lowest since March 2009, moving closer to the 50.0 mark that divides growth from contraction.

  • Exports rose 44.2 per cent in August, slower than the 82 per cent surge in July, as economic turbulence in the United States and Europe, India's top sales destinations, began to bite.

  • India's food price index rose 9.55 per cent in the year to Aug. 27, a week after hitting a near six-month high of 10.05 per cent.

  • Headline inflation in July remained above 9 per cent at 9.22 per cent, about the double the central bank's comfort zone.



(Reuters)


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economy india rbi industrial output