Recovery may be on the way as India's industrial output expands

India's industrial output expanded for the first time in three months in January, an early sign that Asia's third-largest economy may have turned a corner, but a sluggish recovery will likely keep the central bank on track to ease monetary policy further next week.

Production at factories, mines and utilities grew 2.4 per cent in January from a year earlier, government data showed on Tuesday. The outcome was almost double the 1.2 per cent forecast by analysts, and marked an encouraging bounce from an annual contraction of 0.5 per cent in December.

However, the data highlighted pockets of weakness and underscored the challenges facing the economy as it struggles to motor on from a sharp slowdown. While production of consumer goods recovered, posting an annual growth of 2.8 per cent in January, capital goods output – a key investment indicator – fell an annual 1.8 per cent.

The sector has grown just once in the last 10 months.

Rupa Rege Nitsure, chief economist at Bank of Baroda, said the January data showed improved manufacturing activity, especially in electrical machinery production, chemical products and consumer non-durables.

"However, it's too early to comment on the sustainability of this trend. I still expect the RBI to cut policy rates by 25 basis points on Tuesday."

Worried about a deepening economic slump and encouraged by a slowdown in the headline inflation, the Reserve Bank of India (RBI) cut interest rates in January for the first time in nine months.

But it warned that room for further monetary easing was limited unless inflation and a high current account deficit improved by more than expected.

Expectations for any aggressive monetary easing were tempered by separate data on Tuesday that showed a pick-up in consumer inflation. Even so, investors are betting a sluggish economy will force the RBI to cut rates by another 25 basis points at its upcoming policy review on March 19.

India's economy has been hamstrung by weak capital investment and flagging consumer demand. A series of government policy U-turns and a slowdown in the rate of implementing key industrial and infrastructure projects have added to investor gloom.

The economy grew just 4.5 per cent in the three months ending in December, the worst pace since the first quarter of 2009.

The government's preliminary estimates peg the full-year growth at 5 per cent in the year ending in March, a sharp fall from the near double-digit growth rates of the mid-2000s, and the slowest growth in a decade.

"The data corroborates broad expectations that the consumption demand is showing signs of bottoming out, though the third consecutive monthly decline in capital goods production does not bode well for investment sentiment," said Radhika Rao, economist at DBS.

Consumer price inflation inched up to 10.91 per cent in February from 10.79 per cent a month ago, data showed.

* Bloomberg News