Expert views: June industrial output contracts 1.8%

INDIA-ECONOMY-IIP:Expert views: June industrial output contracts 1.8 pct

India's industrial production contracted 1.8 percent in June, driven down by a slump in manufacturing, government data showed on Thursday.

Analysts had expected a rise of 1 percent in June output, a Reuters poll showed. The output for May was revised to 2.5 percent from 2.4 percent.

Manufacturing, which constitutes about 76 percent of industrial production, shrank an annual 3.2 percent from a year earlier, the federal statistics office said.

COMMENTARY

DARIUSZ KOWALCZYK, ECONOMIST, CREDIT AGRICOLE CIB, HONG KONG

"The data bodes ill for Q2 (FY Q1) GDP growth which may well remain below 6 percent year-on-year. It highlights continued softness of the Indian economy amid contracting exports and weaker domestic demand. The data is likely to facilitate a rate cut soon, and we continue to expect 50 bps this year."

MARKET REACTION

* India's benchmark 10-year bond yield eased 2 basis points to 8.10 percent after the factory data.

* The Sensex trimmed gains to trade up 0.2 percent from 0.4 percent beforehand.

* The benchmark five-year OIS rate dropped 2 basis points to 7.06 percent.

* The partially convertible rupee trimmed gains to 55.18 per dollar from 55.08 beforehand.

BACKGROUND

- P. Chidambaram, India's new finance minister, sought on Monday to allay investor worries about an economy growing at its weakest pace in almost a decade by pledging to address their concerns over taxes, public finances and interest rates.

- A summer drought makes a bad situation worse for an Indian economy already crippled by a sharp slowdown in growth, persistent inflation and a politically hamstrung government.

- More economists slashed their economic forecasts for India, with Citigroup and CLSA cutting their outlooks for growth to 5.4 percent and 5.5 percent respectively in the fiscal year ending March, with a weak monsoon adding to economic headwinds.

- Citigroup said a policy gridlock, recent power outages, weaker exports and falling domestic consumption will take a toll on Asia's third-largest economy.

- On Tuesday, rating agency CRISIL cut its growth forecast to 5.5 percent for the fiscal year ending March, just two months after pruning its projection to 6.5 percent from 7 percent.

- Growth faltered to a nine-year low of 5.3 percent in the March quarter, due to stalled economic reforms and higher interest rates.

- The Reserve Bank of India left interest rates unchanged in July for the second straight review, showing that bringing down stubbornly high inflation is its top priority even as economic conditions deteriorate.

- The main gauge of inflation, the wholesale price index, likely grew 7.37 percent year-on-year in July, compared with 7.25 percent in June, a Reuters poll showed.