In another month of subdued growth, India's factory output rose 3.7% in January, marginally higher than the revised 2.53% expansion in the previous month. This will add another set of worries to the policymakers trying to sustain high growth while keeping prices under check."IIP has come down and average is now 8.3% in 10 months. It is better. But I am still not happy," finance minister Pranab Mukherjee said.
Capital goods output contracted 18.6 % in January in a sign that higher cost of credit and rising input cost pressures may have forced companies to defer planned investments.
Industry leaders said any further rise in interest rates would cause the loss of momentum in manufacturing to worsen.
Industry captains and experts will be keenly watching for cues that the Reserve Bank of India (RBI) will send out in its mid-quarter monetary policy review next week.
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.
In January, 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 cash from the economy - means it would suck excess cash, whicl lowers demand and cools prices.
"The performance of the capital goods sector is of particular concern as it has witnessed negative growth for the second consecutive month," said Rajiv Kumar, director-general of industry chamber Federation of Indian Chambers of Commerce and Industry.
"The rising cost of capital may be responsible for this slowdown in investments."