New Delhi: India’s factory output slowed in June after eight months of double-digit growth, as demand cooled and the base effect of a year ago faded away.

Planning Commission deputy chairman Montek Singh Ahluwalia said that despite the slowdown in industrial production, the economy will maintain its expected 8.5% growth rate.

The Index of Industrial Production, or IIP, declined to a 12-month low of 7.1%. It was 8.3% in the same month last year, and 11.3% in May. China’s IIP slacked to an 11-month low of 13.4% in July.

Loading video...

Analysts said the reasons for the output slowing down in the two fastest growing major economies were different.

Samiran Chakraborty, chief economist at Standard Chartered Bank, said the slowdown in China was policy-induced, while in India, it was due to the internal dynamics of the demand cycle.

“In India, the high industrial output growth in the past few months was due to the unusually high spate of demand and inventory restocking. That is coming to an end," he said. “The slowdown is further guided by the fading away of the base effect. In that sense, it is not slowdown but coming back to the normal trajectory of growth."

Taimur Baig and Kaushik Das, economists with Deutsche Bank AG, also said this was not a cause for concern.

“The slowing of industrial production growth will likely generate headlines, but, in fact, production remains strong. Indeed, on a seasonally adjusted basis, industrial production rose by 1.1% month-on-month," they said.

But Mridul Saggar, chief economist with Kotak Securities Ltd, said the slowdown in IIP growth is partly policy-induced in India too. “Withdrawal of fiscal stimulus has impacted aggregate demand as government consumption demand has slowed down."

Rohini Malkani and Anushka Shah, economists with Citigroup, said in a report that the numbers were expected to be lower due to the fading of the base effect. But the decline was sharper than estimated because the machinery and equipment sector saw growth slip from 24.7% in May to 9.5% in June.

While the slowdown was driven by significantly lower growth in basic goods and capital goods, intermediate and consumer goods showed resilience despite the base effect.

The capital goods sector slowed down to single-digit growth after five months of double-digit expansion, while the growth in consumer goods doubled in June.

Graphic: Yogesh Kumar / Mint

He added that industrial growth in June had indeed slowed more than expected. “I will not conclude from the June figure that this is going to be the trend for the rest of the year. A lot of individual components seem to be showing reasonably good growth."

With rising interest rates and increasing capacity constraints in the economy, analysts expect IIP to continue growing in single digits in the coming months.

“We see IIP growth to remain in high single digits and come at 8-9% for the full year. To repeat the double-digit growth of last year, we need quick strong recovery in investment and exports, which may be difficult as global growth is set to weaken further," said Arun Singh, senior economist with Dun and Bradstreet.

Citigroup’s Malkani and Shah expect industrial growth to moderate to the 8% range. “These numbers have been factored in our FY11 GDP estimate of 8.4%," they said.

But the slower growth in industrial production in unlikely to impact the Reserve Bank of India’s policies.

“In view of persistent inflationary pressures in the economy, anchoring inflationary expectations will continue to be at the forefront of RBI’s policy agenda," said Singh of Dun and Bradstreet.

His firm expects repurchase (repo) and reverse repo rates to rise by 25 basis points each, and the cash reserve ratio by 50 basis points. One basis point is one-hundredth of a percentage point.

RBI infuses cash into the system at the repo rate when commercial banks want money from it, while banks park excess money with the central bank at the reverse repo rate. The money that banks must keep with RBI is the cash reserve ratio.

On 27 July, RBI raised the repo rate by 25 basis points and the reverse repo rate by 50 basis points.

“Though this is expected to contain demand-side pressures surfacing in the domestic economy, investment is unlikely to be hampered," said Singh.

PTI contributed to this story.