India's industrial output grew at a slower-than-expected pace in February, dragged down by continued contraction in capital goods, but a hawkish central bank is still expected to tighten monetary policy as it battles stubbornly high inflation. Production at factories, mines and utilities grew 3.6 percent on year in February, lower than an upwardly revised 3.9 percent growth a month ago and below the median forecast for a 5.2 percent rise in a Reuters' poll.
The manufacturing sector, which contributes about 80 percent to overall output, grew an annual 3.5 percent in February. Capital goods output fell 18.4 percent during the month compared with an almost 47 percent growth in the same period last year. "Weaker-than-expected February industrial production is unlikely to throw a spanner in RBI's (Reserve Bank of India) way, with a 25 basis points hike at the May meet a near certainty as inflation remains the main policy driver at this juncture," said Radhika Rao, an economist at Forecast Pte in Singapore.
Economists and bond traders expect the central bank to raise benchmark short-term interest rates by 25 basis points at the next monetary policy review, scheduled on May 3. The most-traded 7.80 percent 2021 bond yield dropped 1 basis point to 7.86 percent after the factory output data. The main share index extended losses to be down 0.6 percent from 0.4 percent beforehand.
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