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New Delhi: India’s factory output growth eased in January against an upwardly revised December number, while retail inflation quickened for the second consecutive month in February though it remained well below the central bank’s comfort level.

The growth in Index of Industrial Production (IIP) slowed to 2.6% in January from a revised 3.2% a month ago because of lower electricity generation and manufacturing output. Provisional IIP data in December released earlier had shown a growth rate of 1.7%. Retail inflation accelerated to 5.37% in February from 5.19% in the previous month because of higher food and fuel prices.

The sharp upward revision of growth in factory output in December came as a surprise. While growth of basic goods is revised from the provisional 2.4% to 5.7%, growth capital goods output changed from 4.1% to 5.3% in December.

During January, while mining production continued to contract for the second month in a row by 2.8%, manufacturing output grew 3.3%, while electricity generation grew at 2.7%.

In terms of industries, 14 out of the 22 industry groups in the manufacturing sector showed positive growth during January, with electrical machinery and apparatus (28.1% growth), furniture manufacturing (23.5%), and rubber and plastic products (15.3%) being the highest contributers.

While the volatile capital goods segment grew in double digits at 12.8%, consumer durables contracted for the ninth months in a row at 5.3% in January.

Madan Sabnavis, chief economist at the CARE Ratings, said industrial growth for January has come in higher than expected, with the cumulative growth (April-January) being 2.5% against 0.1% for the 10 months period during the same period a year ago. “For the entire year, growth is likely to be in the region of 3% and a more discernable recovery could take place in FY16 (fiscal year 2016) provided we are able to build on the foundation that has been laid this year," he added.

Sabnavis said that while a higher inflation number was expected especially on the food side, the unseasonal rain in February-March in North India needs to be evaluated in terms of their impact on prices in the coming months.

“While the direction of interest rates is downwards, given the slightly higher number this time and the possible higher number in March, depending on the adverse impact of the rain on the food index, especially vegetables, RBI (Reserve Bank of India) may hold on to rates in the policy and reserve the prerogative to take action once a clearer picture emerges in between polices," he added. RBI will announce its bimonthly monetary policy review on 7 April.

Agriculture minister Radha Mohan Singh informed the Rajya Sabha last week that unseasonal rain has affected crops in more than 5 million hectares in several states including Punjab, Haryana, Maharashtra and Uttar Pradesh. While rising prices of fruits and vegetables are testimony to the damage caused by untimely rain, the government expects that production of wheat—the main rabi or winter crop—will not be affected and might even surpass last year’s output of 96 million tonnes.

The finance ministry and RBI announced on 2 March a monetary policy framework that will look to contain consumer price inflation within 6% by January 2016 and within 4% with a band of 2 percentage points for all subsequent years.

RBI cut its key policy rate by 25 basis points to 7.5% on 4 March, following a similar cut on 15 January, after the government put out a new fiscal consolidation roadmap in its budget presented on 28 February. A basis point is one-hundredth of a percentage point.

RBI in its monetary policy statement released on 4 March said disinflation is evolving along the path set out by the central bank in January 2014 and, in fact, at a faster pace than earlier envisaged. “Softer readings on inflation are expected to come in through the first half of 2015-16 before firming up to below 6% the second half," it added.

However, the central bank cautioned that the uncertainties surrounding any inflation projection continue. “Oil prices have firmed up in recent weeks, and significant further strengthening, perhaps as a result of unanticipated geopolitical events, will alter the inflation outlook. Other international commodity prices are expected to remain benign, given still-sluggish global demand conditions. Food prices will be affected by the seasonal upturn that typically occurs ahead of the southwest monsoon and, therefore, steps the government takes on food management will be critical in determining the inflation outlook. Finally, the possible spillover of volatility from international financial markets through exchange rate and asset prices channels is also still a significant risk."

RBI cautioned that in the short run, the postponement of fiscal consolidation to the 3% target by one year will add to aggregate demand while maintaining that the government’s commitment to improve quality of fiscal adjustment may compensate for the delay.

The International Monetary Fund (IMF) said in a report released on Wednesday that India’s near-term growth outlook has brightened and the balance of risks have become more favourable, helped by greater political certainty, policy action and a conducive economic environment.

IMF’s growth projections for the economy, however, are lower than the government’s. In the report, the fund forecast that the economy will grow 7.2% in the year that ends on 31 March, using the new method of calculating gross domestic product. The government has estimated 7.4% growth. In 2015-16, IMF projects India to grow 7.5%; the finance ministry has estimated the growth rate at a faster 8.1-8.5%.

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