May factory output slows but RBI unlikely to pause with rate hikes

Factory output in May grew by 5.6 period over the corresponding period lastyear, lower than the median rate of 8.2 per cent forecast by economists in aReuters poll.

The slow growth of factory output in May is unlikely topersuade the Reserve Bank of India (RBI) to reconsider its monetary policy oftightening interest rates to combat inflation. Inflation had touched 9.06 per cent in May.

"We are in for more rate hikes," D.K.Joshi, chief economistat Crisil Ltd, said.

In mid-June RBI had increased its policy rate by 25 basispoints (one-hundredth of a percentage point). At present the policy rate, orrepo rate (at which RBI lends to banks) is 7.5 per cent.

Though growth in May's factory output, as represented by theIndex of Industrial Production (IIP ), may not persuade RBI to change itsmonetary policy stance, it may have a bearing on the magnitude of future rateincreases.

"The degree of slowdown in growth would have implications onRBI's rate increase plans," said Sudhakar Shanbhag, Chief Investment Officer,Kotak Mahindra Old Mutual Life Insurance Ltd, in an emailed statement.

Growth of May's factory output was dragged down by a slowpace of increase in manufacturing output. Manufacturing output in May grew 5.6per cent, lower than the 6.3 per cent growth recorded in April.

A media statement issued by the statistics ministry said theApril factory output was being revised downwards to 5.76 per cent from the 6.3per cent announced last year. Typically, when growth begins to moderate, highfrequency data such as monthly factory output gets revised downwards asprovisional figures are replaced by final ones.

The average growth infactory output for the first two months (April- May) of 2011-12 was 5.7 percent. Joshi forecast factory output would grow faster in the rest of the yearand average 7 per cent for the fiscal.

Disaggregate data on May's manufacturing output showedcapital goods recorded a slowdown in the pace of growth as compared to April.Capital goods in May grew 5.9 per cent, as compared to a growth of 6.9 per centin April.