Pickup in output, cooling inflation brighten India outlook

By Rajesh Kumar Singh

NEW DELHI (Reuters) - India'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 lending rates, slowed to 5.52 percent in October from a multi-year low of 6.46 percent a month earlier, helped by slower annual rises in food and fuel prices.

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

Wednesday's data is expected to bolster the outlook for Asia's third-largest economy which is recovering weakly from a two-year spell of sub-5 percent growth.

Economic growth hit a 2-1/2 year-high of 5.7 percent in the quarter to June, prompting some economists to predict 6 percent growth for the fiscal year to March 2015, higher than 5.5 percent projected by the central bank.

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

Cooling prices will intensify pressure on the RBI to cut interest rates to stimulate consumer demand which powers 60 percent 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 percent."

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 one of Asia's highest lending rates on hold for a fourth straight meeting in September.

It is widely expected to maintain the status quo when it reviews monetary policy on Dec. 2.

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

(Reporting by Rajesh Kumar Singh; Editing by Nick Macfie)