May factory growth seen picking up, June inflation easing

By Rahul Karunakar

BANGALORE (Reuters) - Factory output probably rose for a second consecutive month in May, despite slow growth in core industries, while inflation eased last month, a Reuters poll predicted.

The poll of more than 30 economists, conducted July 1-9, showed industrial output (IIP) expanded 3.8 percent annually, up for the second straight month after posting a 3.4 percent rise in April - its first since January.

Production in the country's eight core industries, which make up almost 40 percent of the IIP, rose an annual 2.3 percent in May, according to data last week.

None of the economists polled expect a contraction for overall output in May and positive data would be encouraging for Asia's third-largest economy as a manufacturing slowdown dragged economic growth to a decade low of 4.7 percent in 2013-14.

The government on Thursday unveiled a budget of structural reforms that seeks to revive growth while keeping a lid on more borrowing.

"The market is building a case for a reformist budget, along with fiscal prudence, for a revival of the economy and investment cycle," said Manish Oswal, securities analyst at KR Choksey, before the budget was announced.

"We think the budget will signal a fresh leg of capital flows and domestic investments and improve the job market."

Prime Minister Narendra Modi has also made controlling inflation a priority since taking office in May.

Consumer price inflation probably eased to 7.95 percent last month, down from May's 8.28 percent, the Reuters poll of economists found.

Wholesale price inflation was forecast to have eased to 5.80 percent last month, down from a five-month high of 6.01 percent in May.

But prospects of weak monsoon rains and turmoil in Iraq have increased the risk of rising food and fuel prices.

"The state of monsoon is going to play a major role," said Nitesh Ranjan, chief economist at Union Bank of India.

The Reserve Bank of India - which considers both inflation indicators to make monetary policy decisions - has raised policy rates three times since September.

However, with economic growth at historically low levels, RBI Governor Raghuram Rajan has kept the repo rate on hold since February.

"A sub-normal monsoon scenario puts the ball in the government's court to prevent a rate response by the RBI," Ranjan said.

(Polling and analysis by Diptarka Roy and Shaloo Shrivastava; Editing by Jacqueline Wong)