Indian industry output rebounds but outlook gloomy

NEW DELHI (Reuters) - Activity at Indian factories recovered in September from its slowest pace in a decade as consumers spent for the festival season, but analysts said the rebound would be short-lived after the global credit crisis turned on India in October.

Industrial production rose 4.8 percent in September from a year earlier, well above August's 1.4 percent and a shade above a Reuters poll forecast of 4.7 percent, sending shares into positive territory.

But the rally was brief as analysts warned industrial output was set for a severe slowdown after the credit crisis paralysed India's money markets in October, pushing up firms' interest costs as they battled tough business conditions.

"We expect much weaker industrial production data going ahead, including it turning negative," A. Prasanna, economist at ICICI Securities, said.

"Taking into account the worsening of the economic outlook and likely easing of inflation, we expect the central bank to further cut rates."

India's markets see-sawed after the data, with the rupee trimming losses as shares hovered above the worst of the day's lows. The benchmark 10-year bond yield fell 4 basis points to 7.64 percent as expectations of lower interest rates grew.

The central bank has reduced its key lending rate by 150 basis points to 7.5 percent in the past few weeks as the global financial crisis withered credit and sparked concerns of a steeper than expected economic slowdown at home and abroad.

It also slashed banks' cash reserve requirements to release liquidity into the banking system and to boost growth ahead of elections next year.


Industrial output is geared mostly to the domestic market and contributes about a fifth of the gross domestic product.

Finance Minister Palaniappan Chidambaram called the data encouraging after August's poor result.

April-September production grew at 4.9 percent compared to a growth rate of around 10 percent in the year-ago period.

September was the month before the Diwali festival season, a time when Indians often go out and spend.

The improvement over August was aided by a 13.1 percent jump in output of consumer durables, such as fridges and televisions, after durable production contracted in September 2007.

Economists expect broader economic growth to slow to 7 percent or below in the fiscal year 2008/09 from annual rates of 9 percent or above in the past three years.