Economic outlook brightens on positive IIP, retail inflation data

The country's economic outlook brightened on Wednesday with a surprise pickup in industrial output and further cooling in consumer prices, data showed, boosting Prime Minister Narendra Modi's bid to end the longest slowdown in growth in decades.

Retail inflation, which the Reserve Bank of India (RBI) tracks in setting key policy rates, slowed to 5.52 per cent in October from a multi-year low of 6.46 per cent a month earlier, helped by slower annual rises in food and fuel prices.

Industrial output unexpectedly grew 2.5 per cent year-on-year in September, its fastest pace in three months, helped by a rebound in the capital goods sector, separate government data showed.

The official data released on Wednesday is expected to bolster the outlook for the domestic economy, which is recovering weakly from a two-year spell of below 5 per cent growth.

Economic growth hit a two-and-a-half-year-high of 5.7 per cent in the quarter ended June 30, prompting some economists to predict 6 per cent growth for the financial year ending March 31, 2015, higher than the 5.5 per cent estimate by the central bank.

However, lacklustre industrial production since then has led some to trim their more optimistic projections.

Cooling prices will intensify pressure on the central bank to cut interest rates in a bid to stimulate consumer demand, which powers 60 per cent of the economy.

"A rate cut at this juncture will no doubt add to the existing positive growth impulses," said Prithviraj Srinivas, an economist with HSBC.

"But such a move would also increase the risk that the RBI misses its inflation target... To return inflation back to the level last seen in the period between 1999 and 2005, when CPI inflation averaged just 4 per cent."

Worries that price pressures would revive once food prices pick up due to a weak monsoon and the fading of base effects led the RBI to leave the lending rates on hold for a fourth straight monetary policy review meeting in September.

The central bank is widely expected to maintain the status quo when it reviews monetary policy on December 2.

Slowing inflation, however, has bolstered hopes for a rate cut in 2015, triggering a rally in the bonds market.

(Reuters)