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Factory slip fortifies RBI rate cut case

New Delhi, Jan. 11: Industrial output fell to a four-month-low of 0.1 per cent in November — a strong enough case for the Reserve Bank to cut its key rate in its policy review later this month.

Poor performance of manufacturing and mining sectors and a decline in the production of capital goods have led to the decline in the index of industrial production, with the Diwali holiday playing its part.

In October, factory output recorded a robust 8.3 per cent growth.

“The correction in the November industrial production was largely priced in on the passage of festive demand and manufacturers possibly drawing down on inventories rather than stepping up production towards end-2012,” Radhika Rao, economist at Forecast Pte, Singapore, said in a research note.

Output was affected by the Diwali holiday, which was in November last year, whereas in 2011 it was in October. Diwali sees many factories remaining closed for a day or two.

Nevertheless, the dim factory output data underscore the challenge Prime Minister Manmohan Singh faces in pushing up growth.

Singh has launched a slew of bold measures that included cutting fuel subsidies, hiking rail passenger fares and opening up the retail sector to foreign players.

However, investments are showing little signs of an upturn. Capital goods production, seen as a guide to investment levels, has grown just once in the last eight months. In November, it shrank 7.7 per cent.

“The contraction in capital goods after a brief reprieve last month reiterates that investment cycle is yet to pick up in a meaningful manner,” said Shubhada Rao, chief economist at Yes Bank.

Manufacturing, which constitutes over 75 per cent of the index of industrial production, grew a meagre 0.3 per cent in November against 6.6 per cent in 2011.

Apex bank move

Analysts expect the central bank to take a cue and slash key policy rates in its monetary policy review on January 29.

Both politicians and industry leaders have been pleading for the Reserve Bank to reduce interest rates that are among the highest among the major economies.

The RBI has left its policy repo rate unchanged at 8 per cent since April 2011, citing stubbornly high inflation.

 
 
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