India's industrial output recovered in November, providing a glimmer of optimism for a battered economy and giving the RBI room to hold off on easing monetary policy after two years of tightening.
Production at factories, mines and utilities grew 5.9 percent from a year earlier in November, its fastest since June, recovering from a contraction in the previous month and well above the forecast of 2.2 percent growth in a Reuters poll.
Industrial output data is notoriously volatile, and the November figure was above even the highest estimate among 32 economists in the poll, which ranged from contraction of 4 percent to expansion of 5.6 percent.
"I think the RBI will take comfort from the industrial output number as it shows growth is shaky but not negative. It also allows the central bank to continue to focus on inflation," said Madan Sabnavis, chief economist with CARE Ratings, who does not expect any monetary easing before the end of March.
India's economy has been hurt by a combination of feeble growth in the United States and Europe, a prolonged spell of monetary tightening to quell high inflation, and decision-making paralysis in the federal government.
The central bank has said growth concerns are back on its radar, but that the actual easing of policy would depend on the inflation momentum.
Bond yields and swap rates rose following the release of the data, which disappointed hopes that the Reserve Bank of India would begin monetary easing sooner rather than later, before quickly retreating to earlier levels.
The October figure was revised to annual contraction of 4.7 percent from the previously reported 5.1 percent.
Headline annual inflation is expected to have slowed to 7.5 percent in December, after running above 9 percent for a year, as food prices eased. The data will be released on January 16.
Manufacturing output, which contributes about 76 percent to industrial production, grew 6.6 percent from a year earlier.
RBI'S Next Move
Prime Minister Manmohan Singh said on Sunday that the economy would likely grow about 7 percent in the fiscal year ending March 31, below a revised government forecast of about 7.5 percent and sharply lower than 8.5 percent growth last fiscal year.
The RBI, which has raised interest rates by a total of 375 basis points since March 2010 to stem inflation, will next review policy on January 24.
Some analysts expect the RBI to cut the cash reserve ratio, or the proportion of deposits that banks must keep as cash with it, to ease a cash crunch in the banking system.
The RBI has been buying government securities from the open market to inject liquidity and has bought 497 billion rupees of the government debt since late November.
"The central bank is also likely to prefer bond buybacks to a cut in the cash reserve ratio since a CRR cut will look contradictory to current monetary stance," CARE's Sabnavis said.
While private economists predict more pain for the economy in coming months, officials in New Delhi are betting on a modest rebound beginning in the current quarter, on hopes for an improvement in the external environment, slowing inflation and lower interest rates at home.
Early signs of that recovery came as manufacturing surged to a six-month high in December while services grew at their fastest pace in five months.
Car sales, after falling for four months, rose for a second month in December, climbing 8.5 percent from the same month a year earlier.
Collections of excise duty, a tax levied at the factory gate, rose an annual nearly 10 percent in December indicating a possible rebound in manufacturing activity in Asia's third largest economy. Excise collections had recorded an annual decline in November.
