India's factory output grew by a moderate 4.1% in February, a key data that will likely influence the Reserve Bank of India's (RBI) next move on interest rate hikes. Analysts, however, expect the central bank to reduce lending rates only slightly in its annual monetary policy review next week.
But strikingly the January factory output growth, measured by the index of industrial production (IIP), was revised down to 1.1%, from 6.8% reported earlier.
This reflected a major revision to the consumer non-durables goods sector production data, with the year-on-year growth revised down to 11% from 42.1% reported earlier. Reportedly the revision was due to errors in sugar output data.
"These (IIP) figures will have a bearing on the monetary policy," said finance minister Pranab Mukherjee. "The government along with the RBI will take required steps to revive activity in the economy."
The central bank had raised key policy rates 13 times during March 2010 to October 2011 to contain rising spiralling inflation. It has, however, kept interest rates unchanged since its December policy review.
At present, the repo rate - the rate at which banks borrow from the RBI - stands at 8.5%. Cash reserve ratio (CRR), which is the percentage of deposits banks have to park with the central bank, is at 4.75% following a surprise reduction of 0.75 percentage points a week ahead of the annual budget last month.
"We think the RBI will be willing to support growth by cutting the repo rate by 0.25 percentage points in the upcoming monetary policy meeting on Tuesday, unless the March inflation number surprises sharply to the upside," Deutsche Bank said in research report on Thursday.
Wholesale price index (WPI)-based inflation, India's most watched cost of living index, stood at 6.95% in February after falling to a two-year low of 6.55% in the previous month.
A higher inflation, in turn, may prompt the RBI to maintain interest rates at high levels.