India's industrial output unexpectedly contracted 3.5 per cent in March from a year earlier, government data showed on Friday.
Analysts had expected output to grow 1.5 per cent. The March figure compares with February's annual increase of 4.1 per cent.
Manufacturing, which constitutes about 76 per cent of industrial production, shrank an annual 4.4 per cent from a year earlier, the statistics office said.
DARIUSZ KOWALCZYK, ECONOMIST, CREDIT AGRICOLE CIB, HONG KONG
"The contraction was driven by particularly poor performance of the manufacturing sector, in line with weak exports that month.
"We believe that April saw a turnaround, but until this is confirmed, sentiment will be weak. The data increases the odds of another rate cut, is negative for the INR, and should push INR OIS rates and bond yields down."
SIDDHARTHA SANYAL, CHIEF INDIA ECONOMIST, BARCLAYS CAPITAL, MUMBAI
"I don't think just one data point, and that too IIP, will change the RBI (Reserve Bank of India) policy stance. But we are of the view that incrementally RBI will have to cut rates more and sound dovish. RBI will have a bias to not cut rates till July, but may have to start after that. We expect another 50-75 basis points rate cut in this year."
SAUGATA BHATTACHARYA, ECONOMIST, AXIS BANK, MUMBAI
"The IIP (index of industrial production) number will not lead to a knee-jerk reaction from the Reserve Bank of India. I don't think there will be a reduction in interest rates in June.
"They will wait for other indicators like inflation, and also the global crude oil prices and reform measures taken by the government before deciding on rate cuts."
MARKET REACTION
The Sensex extended its fall to 0.9 per cent after the data, while the rupee dropped to an intraday low of 53.61 to the dollar.
The 10-year bond yield fell 2 basis points to 8.54 per cent.
BACKGROUND
- India's economy probably expanded 6.9 per cent in the 2011/12 fiscal year that ended in March, its slowest pace in three years.
- The RBI, which cut interest rates in April for the first time in three years, has forecast growth at 7.3 per cent in 2012/13.
- Expansion in manufacturing sector picked up pace in April, supported by bulging order books, but slower output growth and increasing price pressures dampened sentiment, a business survey showed.
- Growth in the services sector accelerated a touch in April thanks to a rise in new business, and optimism hit its highest level since June 2011, a survey showed last week.
- Headline inflation slowed marginally to 6.89 per cent in March helped by a softening in prices of manufactured goods, even as food inflation shot up. Analysts expect April inflation at 6.70 per cent.
- The Reserve Bank of India slashed its main lending rate - the repo rate - by a sharper-than-expected 50 basis points in April to help revive growth.
Copyright @Thomson Reuters 2012
Essential Business Intelligence, Continuous LIVE TV, Sharp Market Insights, Practical Personal Finance Advice and Latest Stories — On NDTV Profit.
