India's industrial production grew at a slower-than-expected pace in February, weighed down by a contraction in consumer durables and consumer goods, reinforcing expectations that the central bank could soon cut interest rates for the first time in three years to support the economy.
However, the pace of expansion in industrial production at 4.1% was faster than a sharply revised 1.14% annual growth in January from 6.8% earlier. The government attributed the revision to an error in sugar production data.
Analysts on average had expected a rise of 6.6% in the February output, a Reuters poll showed.
The data, notorious for its volatility, comes on the heels of a sluggish pace of expansion in manufacturing and services sectors.
"The lower February IIP number as well as the huge revision to January data highlights the growth concerns, and cements view of a 25 basis points rate cut from the RBI (Reserve Bank of India) next week," said Vivek Rajpal, India rate strategist at Nomura in Mumbai.
"We now need to see how the March inflation data comes in because if that too surprises on the downside, then we could see a 25 basis points cut along with dovish language in the statement."
The headline inflation data for March is due on Monday. Inflation for the month is expected to have slowed down marginally to 6.70% from 6.95% in February, a Reuters' median poll showed.
The RBI next reviews its monetary policy on Tuesday, when it is widely expected to cut the repo rate - the main policy rate - by 25 basis points to 8.25%.
The RBI has already cut banks' reserve requirement by 125 basis points in two moves since late January, making more money available for lending.
Federal bond yields and swap rate eased following the data, while shares pared gains. The 10-year benchmark bond yield fell 4 basis points to 8.48% after the data.
The one-year overnight indexed swap rate also eased 2 basis points to 7.97%.
The main share index pared gains immediately after the data, while the rupee was largely unchanged at 51.42 to the dollar.
Manufacturing output, which constitutes about 76% of industrial output, grew 4.0% in February compared with an annual 1.4% growth in the previous month.
Production of consumer durable goods shrank 6.7% in February from a year earlier. Consumer goods contracted 0.2% on year.
Capital goods production, a proxy for investment, recorded its first annual growth in six months expanding 10.6% from a year earlier.
India's economy probably expanded 6.9% in the 2011/12 fiscal year that ended on March 31, its slowest pace in three years, as global economic uncertainty combined with high interest rates and input costs at home crimped in v estment.
The government expects a better showing from the economy this fiscal year, and has pegged 2012/13 growth at 7.6%.