Asia Economy

India's Industrial Output Recovers in Jan, Rate Cut Still Seen

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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 it likely won't prevent the central bank from easing monetary policy further.

Still, a pick up in retail inflation has added a level of uncertainty ahead of the central bank's policy review next week.

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

(Read More: India Declares, We're Back in Business)

The output data provided a glimpse of the economy's performance in the quarter to end-March. The economy grew just 4.5 percent in the three months to end-December, the slowest pace since the first quarter of 2009.

"It's a tale of two diverse numbers. IIP (index of industrial production) has come in much higher than anticipated which is a positive news, but is a short-lived relief as the CPI came in significantly higher and the concern on food continues," said Shubhada Rao, chief economist at Yes Bank.

"On IIP, our full year forecast is 1.5-2.0 percent, but the larger focus in terms of the monetary policy takeaway would be CPI. It would weigh on policy concerns. However, as of now we retain our call for a 25 basis-points rate cut on Tuesday."

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

(Read More: India Inflation Slows to More than 3-Year Low in January)

But it warned that room for further monetary easing was limited unless inflation and a high current account deficit improved by more than expected. The next monetary policy review is due on March 19.

Consumer price inflation inched up to 10.91 percent in February from 10.79 percent a month ago, according to separate data on Tuesday.

February wholesale price index data, which the RBI gives more weight to in setting policy, is due on Thursday.

The benchmark 10-year bond yield rose as much as 2 basis points to 7.87 percent following the factory output and CPI data. The partially convertible rupee trimmed gains to 54.31/32 per dollar, compared with 54.21/22 beforehand.

(Read More: India's December Industrial Output Contracts 0.6%)

Manufacturing output, which accounts for the bulk of industrial production and contributes about 15 percent to overall gross domestic product (GDP), grew 2.7 percent in January from a year earlier.

Capital goods output, a key investment indicator, fell an annual 1.8 percent in January. The sector has grown just once in the last ten months. Production of consumer goods, however, recovered, posting an annual growth of 2.8 percent.

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.

(Read More: Why India Struggles to Deliver Its Growth Potential)