Factory growth likely slowed in Jan, inflation to stay muted

Median forecast shows IIP at 0.65% in Jan from 1.70% in Dec

Factory growth probably lost more momentum in January while inflation remained below the Reserve Bank of India's target last month, bolstering chances of further interest rate cuts, a Reuters poll found.

The median forecast from the survey of 24 economists showed annual growth in industrial output slowed to 0.65% in January from December's 1.70%, its second straight month of easing.

"We are still stuck in a bit of a rut of having got out of the bottom but still trying to meaningfully escape or hit a sustainable recovery. We are looking at a muddle-through kind of scenario," said Jyotinder Kaur, principal economist at HDFC Bank.

In his first full-year budget on Feb 28, Finance Minister Arun Jaitley announced several initiatives to boost the industrial sector, particularly infrastructure.

However, none of those announcements will have any effect unless they are implemented. And that could be a tough task since Prime Minister Narendra Modi's ruling party does not hold a majority in the Rajya Sabha.

According to Kaur, key drivers of industrial production such as auto sales and exports foretell a disappointing outlook for industrial growth.

Retail inflation was also probably subdued in February. The poll median showed inflation edged up to 5.20% last month from January's 5.11% on higher food prices.

Predictions for wholesale prices turned more negative as oil prices remained low. Having already sunk to a more than five-year low of -0.39% in January, the poll predicted a further decline to -0.70% last month.

Weak factory output and inflation below the 6% level the RBI is targeting by January could push it to ease policy further.

A separate Reuters survey showed the central bank will still be wary of a pick-up in inflation and only reduce rates gradually.

The RBI surprised markets with another 25-basis-point rate cut last week to take the repo rate to 7.50%, its second such move this year, even though data showed India's economy grew 7.5% in the last quarter, outpacing China.