Government data showed India’s industrial production / output (IIP) unexpectedly contracted 3.5% in March compared with a 4.1% increase in February, as weaker domestic demand and sliding exports hurt the economy, undermining the RBI’s efforts to shore up the weakening INR. Analysts had forecasted output to grow 1.5% to 1.7%. A sharp contraction in India’s industrial output in March reinforces the slowdown trend in the country. The report may stoke concern India’s outlook has worsened because of trade and fiscal deficits, political gridlock, elevated inflation and the threat to global growth from Europe’s debt crisis. The risks that have pushed the nation’s currency toward a record low prompted the central bank to say yesterday that exporters must convert 50% of their foreign-currency earnings into rupees and to access the Forex market only after using up their existing balance, as it stepped up efforts to check the decline. This is likely to create around 2.5 billion dollar inflows in around15 days, arresting some free fall of the local currency.
Indian Equity Markets & the Rupee extended falls after the data was announced. Manufacturing, which constitutes about 76% of industrial production, shrank an annual 4.4% from a year earlier after a 3.9% advance in February, today’s report showed. Mining fell 1.3%, compared with a 2.7% gain in the previous month. Electricity output rose 2.7%. The overall output grew 2.8% in the fiscal year that ended on March 31, much slower than 8.2% growth seen in the previous year. Annual exports from India fell in March for the first time in four months as demand from key trade partners, Europe and the United States, weakened. But the surprisingly sharp rate cut by the RBI of its main lending rate, the Repo rate, at its April meeting in an effort to boost the slowing economy might boost the industrial output number ahead.
Speculation in the currency market is that the Reserve Bank of India may issue government gold bonds with interest rate in the range of 7-8% to attract dollar inflows and stabilize the rupee which is in danger of slipping to a record low. The rupee opened lower against the dollar on Friday as renewed concerns about the euro zone hurt riskier assets, with traders on watch for possible RBI intervention. Inflation, as measured by the benchmark wholesale-price index, moderated to a 29-month low of 6.62 percent in April, according to the median estimate in a Bloomberg News survey ahead of a report due next week.