Factory output falls; inflation drops

NEW DELHI - A fall in factory output at the end of 2008 and the prospect inflation could turn negative in coming months bolstered analysts' expectations for further interest rates cut by showing the pressure the economy was under.

Industrial output unexpectedly fell 2 percent in December from a year earlier, the second fall in three months and sharply below November's downwardly revised 1.7 percent, data showed on Thursday.

The median forecast in a Reuters poll of economists was for industrial output to rise by 1.3 percent.

"Clearly firms are still struggling with excess inventories and cutting production," said A. Prasanna, an analyst at ICICI Securities.

"While there is likely to be some improvement in output numbers in the current quarter, the overall economic outlook continues to be weak on the back of sluggish domestic demand and a collapse in external demand."

Manufacturing production fell 2.5 percent from a year earlier, data showed.

Separate data showed annual inflation fell to 4.39 percent at the end of January, its lowest in just over a year, close to expectations of a sizeable fall from the previous week's 5.07 percent as a fuel price cut took effect.

Inflation has tumbled from a peak near 13 percent last August, and economists said it would continue to fall for some time.

"We expect inflation to be negative for 4-5 months from mid-2009," said Siddhartha Sanyal, economist at Edelweiss Securities.

The data pushed down yields on the benchmark 8.24 percent 2018 bond by 3 basis points, and the partially convertible rupee fell slightly to 48.73/74 per dollar from 48.71/72.

DOUR SENTIMENT

October's 0.3 percent fall in factory output was the first in 13 years, and December's drop reinforced the sharp downturn in Asia's third-largest economy due to a credit squeeze and weak business sentiment in the final quarter of 2008.

"It clearly indicates the problem there in the manufacturing sector. We obviously expect the RBI to cut rates," Anubhuti Sahay, an economist at Standard Chartered Bank.

The central bank has cut its main short-term lending rate by 350 basis points to 5.5 percent since mid-October and has also slashed banks' cash reserve requirements by 400 basis points to 5 percent, to boost liquidity and provide impetus to growth.

A purchasing managers index showed manufacturing activity shrank for a third straight month in January as demand continued to be sluggish due to weak business and consumer confidence.

India's exports have contracted on an annual basis in three consecutive months since October, while imports have also slowed due to slowdown in economic activity.

The government expects the economy to grow 7.1 percent in 2008/09, a rate second only to China among major economies.

Yet that will still be the slowest growth in six years, and the analysts expect even slower growth in 2009/10, a marked slowdown from rates of 9 percent and above in the three years ending 2007/08.