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Nov Industrial Output Grows More Than Expected

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India's industrial output recovered in November, providing a glimmer of optimism for a battered economy and giving the RBI room to hold off on easing monetary policy after two years of tightening.

Production at factories, mines and utilities grew 5.9 per cent from a year earlier in November, the fastest clip since June, recovering from a contraction in the previous month and well above the forecast of 2.2 per cent growth in a Reuters poll.

India's index of industrial production (IIP) is notoriously volatile, and the November figure was above even the highest estimate of the 32 economists in the poll, which ranged from contraction of 4 per cent to expansion of 5.6 per cent.

"I think the RBI will take comfort from the industrial output number as it shows growth is shaky but not negative. It also allows the central bank to continue to focus on inflation," said Madan Sabnavis, chief economist with CARE Ratings, who does not expect monetary easing before April.

India's economy has been hurt by a combination of feeble growth in the United States and Europe, a prolonged spell of monetary tightening to quell high inflation, and decision-making paralysis in the federal government.

The Reserve Bank of India has said growth concerns are back on its radar, but that actual easing of policy would depend on the inflation momentum.

Bond yields and swap rates rose following the release of the data, which dampened hopes that the RBI would begin monetary easing sooner rather than later, before quickly retreating to earlier levels.

The October figure was revised to annual contraction of 4.7 per cent from the previously reported 5.1 per cent.

Headline annual inflation is expected to have slowed to 7.5 per cent in December, after running above 9 per cent for a year, as food prices eased, according to a Reuters poll.

The data will be released on January 16.

Manufacturing output, which contributes about 76 per cent to industrial production, grew 6.6 per cent from a year earlier. The contraction in capital goods production eased to 4.6 per cent from 26.5 per cent in the previous month.

Output of consumer goods rose 13.1 per cent, while output of electricity rose 14.6 per cent in November from a year earlier.

RBI'S Next Move
Prime Minister Manmohan Singh said on Sunday that India's economy would likely grow about 7 per cent in the fiscal year ending March 31, below a recently revised government forecast of about 7.5 per cent and sharply lower than the 8.5 per cent growth achieved last fiscal year.

The RBI, which has raised interest rates by a total of 375 basis points since March 2010 to stem inflation, will next review policy on January 24.

The central bank is expected to focus more on core inflation (non-food manufacturing) in setting monetary policy.

"It largely depends upon the decline in inflation we will see in the December numbers," C. Rangarajan, chairman of the Prime Minister's Economic Advisory Council, told CNBC-TV18.

India's food price index dropped 2.90 per cent in the year to December 31, other data showed on Thursday, while the fuel price index climbed an annual 14.45 per cent.

Some analysts expect the RBI to cut the cash reserve ratio, or the proportion of deposits that banks must keep as cash with the central bank, as a way to ease a cash crunch, although expectations that this could happen in January have eased in recent days.

Also, the RBI has been buying government securities from the market to inject liquidity. It has bought Rs 49700 crore of government debt since late November.

"With core inflation likely to stay uncomfortably high and industrial growth showing some strength, it is difficult to believe that the Reserve Bank of India will cut policy rates or the cash reserve ratio at the January 24 review," said Nomura India strategist Vivek Rajpal.

While private economists predict more pain for the economy in coming months, officials in New Delhi are betting on a modest rebound starting this quarter, on hopes for an improvement in the external environment, slowing inflation and lower interest rates at home.

Early signs of that recovery came as manufacturing activity surged to a six-month high in December, while services grew at their fastest pace in five months.

Car sales, after falling for four months, rose for a second month in December, climbing 8.5 per cent from the same month a year earlier.

Collections of excise duty, a tax levied at the factory gate, rose an annual nearly 10 percent in December, also indicating a possible rebound in manufacturing activity in Asia's third largest economy. Excise collections fell on an annual basis in November.