India's industrial production growth fell to 1.6% in December, the slowest in 20 months from 3.6 % in the previous month adding another set of worries to government's macro economic managers who are grappling for options to sustain growth and keep prices under check.
Finance minister Pranab Mukherjee termed the latest factory output growth data as "disappointing" but added that monthly data do not reflect the correct picture of the overall economy.
"IIP numbers are very unfortunate and it is disappointing but it was on expected lines as it was on yearly basis," Mukherjee said."Monthly and weekly numbers do not reflect correct picture. Therefore you shall have to take the whole year into account. Let us see how it reflects in the annual picture," the finance minister added.
Manufacturing output, which accounts for about 80 % of the industrial production, grew by 1 % in December.
Capital goods output contracted 13.7 % in December in a sign that higher cost of credit and rising input cost pressures may have forced companies to defer planned investments.
Industry captains said any further rise in interest rates would deepen deceleration in manufacturing.
"That the growth of the manufacturing sector is moderating as is evident from the fact that machinery and equipment segment has witnessed a negative growth of 12.8% in December. In the light of this sharp decline, we add a cautionary note on further tightening of monetary policy and exit from the stimulus," said Rajan Bharti Mittal, president of industry chamber Ficci.
The RBI has raised key policy rates seven times so far in 2010-11 to cool prices as as food prices raced into high-double digits pummelled by a supply crunch of staple vegetables.
Last month, RBI maintained the repo and reverse repo rates at 6.5 % and 5.5 % respectively.
A higher repo, the rate at which RBI lends to lenders, raises the banks' borrowing costs prompting them to raise interest rates for final home, auto and corporate borrowers.
A higher reverse repo—the rate at which RBI absorbs excess cash ---means it would suck cash from the system to stymie demand and cool prices.