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IIP shocks with 0.4% fall in September on weak consumer demand

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India's industrial output unexpectedly contracted on weak consumer demand in September, adding to pressure for action by the government with Asia's third largest economy increasingly likely to post its slowest growth in a decade.

Data released by the Central Statistics Office (CSO) on Monday showed output at factories, mines and utilities shrank an annual 0.4 per cent. That was sharply in contrast with a forecast of 2.8 per cent growth in a Reuters' poll.

Manufacturing output, which accounts for the bulk of industrial production and contributes about 15 per cent to overall GDP, fell 1.5 per cent in September from a year ago.

India's festival season, which began in September and will peak this month, was expected to bolster the output data. The sharp slump in output will bolster calls for an interest rate cut from the Reserve Bank of India to perk up the economy.

"Typically, some kind of inventory buildup also happens in September, so the numbers are all the more disappointing," said Anjali Verma, an economist with MF Gobal in Mumbai.

"Going by RBI's guidance, the IIP numbers will now make a strong case for a rate cut to happen in January."

The central bank has so far rebuffed calls for interest rate cuts, saying prices are still rising too fast to risk loosening policy much, and it also wants the government to bring down a worryingly high fiscal deficit. The bank says rising rural wages, a result of government policies, are also stoking inflation.

The next monetary policy review is due in December. The central bank has said any interest rate cut is "highly improbable" at that meeting, since it expects price pressures to remain elevated following a hike in the price of heavily subsidised diesel in September.

Reinforcing the central bank's expectations on inflation, the consumer price index rose an annual 9.75 per cent in October, a tad faster than 9.73 per cent rise a month ago, more government data showed on Monday.

October wholesale price index data, which the Reserve Bank of India gives more weight to in setting policy, is due to be released on Wednesday. A Reuters poll of economists showed wholesale price inflation was seen accelerating to 7.96 per cent, an 11-month high.

The 1-year overnight index swap (OIS) rate fell around 3 basis points to 7.73 per cent after the data. The 5-year OIS rate fell 3 basis points to 7.12 per cent, according to dealers.

The 10-year bond yield was down 1 basis point to 8.21 per cent.

Finance Minister P. Chidambaram told Reuters last week that growth for this financial year could be as low as 5.5 per cent, which would be the slowest rate of expansion since 2002/03.

The government and businessmen have been pleading with the Reserve Bank of India (RBI) to lower interest rates, which are the highest among the major economies.

Copyright @ Thomson Reuters 2012

Story first published on: November 12, 2012 11:30 (IST)

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