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INSTANT VIEW 5-India's Aug industrial output up 2.7 pct, beats forecast

MUMBAI, Oct 12 (Reuters) - India's industrial production rose by a higher-than-expected 2.7 percent in August from a year earlier, after contracting in July.

Analysts polled by Reuters had expected a rise of 1.1 percent in August output. Revised government figures released on Friday showed July output fell by 0.2 percent.

Manufacturing , which constitutes about 76 percent of industrial production, rose an annual 2.9 percent from a year earlier, the federal statistics office said.

In the April-August period, industrial production expanded an annual 0.4 percent.

COMMENTARY RAJEEV MALIK, SENIOR ECONOMIST, CLSA, SINGAPORE

"The improvement in IIP is encouraging but still indicative of activity stabilising rather than signalling a sustained and strong upturn. It is unlikely to play an important role in the RBI's upcoming policy.

"In any case, the RBI's walk does not follow its own hawkish talk. It has already undertaken stealth easing by improving liquidity conditions that have prompted banks to cut rates. It is probably the only central bank in the world worried about inflation but also undertaking actions that facilitate lower lending rates by banks.

"There is a strong possibility of the RBI cutting rates on 30 October. The finance minister has already given a heads up and the government has undertaken some constructive moves although meaningful quantitative and qualitative fiscal correction still remains on a wish list. But it is far better for the RBI to come clean by cutting rates rather than ease while hiding behind a façade."

JYOTINDER KAUR, ECONOMIST, HDFC BANK, NEW DELHI

"We would be cautious in saying this marks a revival in growth. Unless the impediments to investment are removed, there is unlikely to be a significant turnaround in the near future. From the central bank's policy point of view, the headline inflation number remains crucial, and the factory output print coming a little higher than expected is not going to make a big difference."

RADHIKA RAO, ECONOMIST, FORECAST PTE., SINGAPORE

"Firmer headline print should not be misinterpreted as a recovery, as activity stabilises at weaker levels. Higher fuel prices, sticky inflation and high borrowing costs will continue to impinge on demand, while sticky input prices pressure manufacturers' margins. Overall, given weak capex spending and troubled external sector along with moderation in consumption demand, manufacturing trends are likely to remain depressed for the time being."

ANUBHUTI SAHAY, ECONOMIST, STANDARD CHARTERED BANK, MUMBAI

"This number is better than expected no doubt, but it does not change the view on India's growth story, and neither does it move the needle on the central bank's monetary policy stance. It shows that the industrial sector still remains weak. The headline inflation data and reform steps from the government will remain key to the monetary policy."

SONAL VARMA, INDIA ECONOMIST, NOMURA, MUMBAI

"It seems the IIP numbers have bottomed out. I am looking at 2.2 percent industrial growth for the full fiscal year. Consumer durables are doing well. However, it has to been seen whether it can be sustained.

"As of now, we are not expecting any rate cuts in October."

SURESH KUMAR RAMANATHAN, FIXED INCOME AND FOREX STRATEGIST, CIMB, KUALA LUMPUR

"The data is better than expected, manufacturing output was better, but much of it could be related to anticipated increase in diesel prices in September and there must have been ramming of output before the increase. It could be a one-off driven by anticipated increase in diesel prices rather than actual demand driven output.

"I don't see any move by RBI this year as mentioned previously, and it's steady as she goes for now. The question is if this output was very demand driven, September numbers will reflect it. 'One swallow doesn't not make a summer.'"

PRAMIT BRAHMBHATT, CEO, ALPARI FINANCIAL SERVICES, MUMBAI

"The consumer goods and the manufacturing sector pulled the IP numbers beating the industry expectations by huge notches. The data has been a sentiment changer as the IP numbers have been disappointing for some time and the better than expected numbers if supported by a rate cut by RBI in its upcoming policy meet shall be positive for markets.

"The rising capital inflows and better than expected economic numbers from India will force the rating agencies to change their tone in ratings.

"The IP numbers are not widely accepted as genuine or major numbers but shall continue to add to the sentiments."

SHAKTI SATAPATHY, FIXED INCOME STRATEGIST, AK CAPITAL, MUMBAI

"Though much of the upside was largely pushed by the favourable base effect and sharp increase in capital goods, the stability and recovery in intermediate goods gives some comfort, thus indicating an improvement in the production activities.

"We expect the central bank to consider a rate cut in the forthcoming policy meet and would be more keen on taking a look at the forthcoming fiscal announcements in the interim."

SHUBHADA RAO, CHIEF ECONOMIST, YES BANK, MUMBAI

"Across the board, the numbers are presenting that IIP has bottomed out. The use-based classification shows seasonally adjusted numbers in capital goods, intermediate goods are looking positive.

"There are early signs of recovery and the fourth quarter numbers will pick up. In terms of the overall economic activity, the second quarter was the bottom.

"The RBI may not completely ignore this number because it does not present too dismal a picture. However, we do not expect the RBI to cut the repo rate but the RBI will continue to actively manage the liquidity situation.

"The inflation rate could be around 8.25-8.50 percent by December." A. PRASANNA, ECONOMIST AT ICICI SECURITIES PRIMARY DEALERSHIP LTD, MUMBAI

"The supply side issues are getting resolved, and we expect the core sector data to pick up in the coming months. On the consumption side, we see growth, also as financing conditions are easing.

"We are not saying there is going to be a strong recovery but compared to the previous months, the growth is going to improve. The average industrial growth for the year is expected to be slightly lower than 3 percent.

"The only comfort the Reserve Bank of India can draw from this is that things are not worsening further. However, inflation would still matter, and we expect the central bank to be on hold on Oct. 30."

RUPA REGE NITSURE, CHIEF ECONOMIST, BANK OF BARODA, MUMBAI

"Sequentially it still shows a decline of 1 percent on July but year-on-year the number looks healthy because of the base effect but the number is still very bad and shows continued weakness in the industrial sector and is in line with the signals given by other indicators like core industrial output, exports, PMI and passenger car sales, all of which showed a sharp deceleration in August.

"With inflation hovering around 7.7 percent and industrial sector showing continued weakness, we are in a typical stagflationary situation. The RBI will go ahead with its tried and tested method of reducing CRR (cash reserve ratio) as that also helps banks lower their cost of funds and increase lending. I do not expect the RBI to touch rates on Oct. 30 and deliver just a 25 basis point CRR cut."

SUJAN HAJRA, CHIEF ECONOMIST, ANAND RATHI SECURITIES, MUMBAI

"Today's factory output data is much better than expectations, but it is still not a very healthy number. It really does not change the big picture as far as the monetary policy is concerned. We still expect substantive liquidity easing and a 25 basis point cut in the cash reserve ratio on Oct. 30.

"For the full year, we expect IIP at 4.6 percent." UPASNA BHRADWAJ, ECONOMIST, ING VYSYA BANK, MUMBAI

"While IIP figures have come better than expected, we expect RBI to consider the recent spate of remedial measures undertaken by the government and be more watchful about the upcoming inflation figure before taking a policy decision."

G. CHOKKALINGAM, EXECUTIVE DIRECTOR & CHIEF INVESTMENT OFFICER, CENTRUM WEALTH MANAGEMENT, MUMBAI

"IIP alongside other indicators like oil imports support argument of a recovery in industry sector. The 2.7 percent growth is still however lower by historical standards. Interest rate cut would be the most important thing to watch next."

MARKET REACTION

Markets showed muted reaction to the data. The 10-year bond yields briefly fell, but then recovered to 8.17 percent, the rupee weakened slightly to 52.75 from 52.70 beforehand, while the BSE index was still slightly lower.

Both the 1-year and 5-year swap rates edged down 1 basis point each to 7.60 and 6.99 percent respectively. BACKGROUND

- India's economic slowdown has bottomed out, but a full recovery requires tough decisions, Finance Minister P. Chidambaram said on Monday, signalling his intent to push through unpopular reforms.

- The country's annual exports fell for the fifth consecutive month and imports rose in September, pushing the trade deficit to its widest in 11 months in the latest bleak data from Asia's third largest economy as it struggles to balance its finances.

- India's growth slump has passed and the economy will gradually recover over the next year, a Reuters poll showed, but the rate of expansion for this fiscal year will still be the weakest in a decade.

- The services sector expanded at its fastest pace in seven months in September as a spurt in new business encouraged firms to hire more staff, a survey showed last week, suggesting the worst of the economic slump may be over.

- The government looks set to begin dismantling a complex web of regulatory requirements that throttle India's infrastructure growth, with plans to set up a special body this week to speed up projects in a sector seen as vital to reviving economic momentum.

- The cabinet approved bills last week to attract foreign investment into insurance and pensions among a package of new measures to restore confidence in the economy, although the reforms will face a tough fight in parliament.

- India still faced a one-in-three chance of a credit rating downgrade over the next 24 months, Standard & Poor's said, although a series of reform steps launched in September had slightly improved the country's prospects.

- New Delhi's new-found appetite for economic reform offered a promising path to improving growth outcomes for the Indian economy, U.S. Treasury Secretary Timothy Geithner said on Tuesday during a visit to the Indian capital.

- Inflation probably accelerated to its highest level this year in September because of costlier fuel after the government cut subsidies, according to a Reuters poll, complicating the task of the central bank as it faces pressure to ease monetary policy to revive growth.

- In September a government panel warned that India was on the edge of a "fiscal precipice" and should urgently slash fuel, food and fertilizer subsidies to curb a budget deficit that could hit 6.1 percent of gross domestic product this fiscal year.

(Reporting by Treasury team, editing by Ranjit Gangadharan)

((ranjit.gangadharan@thomsonreuters.com; 91-22 6180 7240; Reuters Messaging: Reuters Messaging: ranjit.gangadharan.reuters.com@reuters.net))

Keywords: INDIA ECONOMY/ INDUSTRIAL OUTPUT (INSTANT VIEW, UP