Industrial output tipped to fall, raising stakes for rupee

By Rajesh Kumar Singh

NEW DELHI (Reuters) - India is expected on Monday to report a second straight contraction in industrial production in June, underscoring the challenge for policymakers to stabilise the battered rupee without hurting economic revival.

A Reuters poll of 20 economists predicts output at factories, mines and utilities shrank an annual 1.2 percent, after unexpectedly falling 1.6 percent in May.

The consumer price index for July is also due to be released on Monday. Retail inflation was 9.87 percent in June, and high food prices are expected to keep it elevated.

"Industrial activity is not picking up. Investment activity is stagnant," said N.R. Bhanumurthy, a professor at the National Institute of Public Finance and Policy.

Growth in Asia's third-largest economy has been stuck below 5 percent for the past two quarters and analysts have been scaling back expectations for the current year as measures to support the rupee have pushed up credit costs.

Last month, the Reserve Bank of India (RBI) engineered an increase in money-market interest rates in an effort to give investors in short-term rupee debt an incentive to keep their money in India.

"The recent monetary tightening and uncertain global capital market environment could mean growth stays low for at least two more quarters," Morgan Stanley said in a note last week.

"Meanwhile, a weak growth trend lasting for 4-5 quarters would increase the risk of a vicious cycle building, whereby the economy becomes vulnerable and the risk increases of GDP growth sliding to 3.5-4 percent," it said.

The rupee has lost around 12 percent to the dollar since the start of May after the U.S. Federal Reserve said it would begin scaling back stimulus measures. The Fed's comments have raised concerns that foreign investors will retreat from vulnerable emerging markets such as India and return to higher yields available in the U.S. Treasury market.

The rupee hit a record low of 61.80 to the dollar on Tuesday, dragged down by a record high current account deficit of 4.8 percent of GDP in the last fiscal year.

The RBI unveiled further measures late on Thursday to drain cash from the financial system by auctioning government cash management bills every week.

Finance Minister P. Chidambaram is expected soon to announce steps to encourage inflows, which could include raising money from Indians abroad, ordering state firms to raise debt abroad and clamping down on non-essential import items.

"These measures can help the rupee in the short-run. But it will be growth prospects that will guide the medium to long-term view on the rupee," Bhanumurthy said.

(Editing by Tony Munroe and Mark Bendeich)