New Delhi: India's industrial production contracted 1.8 percent in June, driven down by a slump in manufacturing, government data showed on Thursday.

Analysts had expected a rise of 1 percent in June output, a poll showed. The output for May was revised to 2.5 percent from 2.4 percent.

Manufacturing, which constitutes about 76 percent of industrial production, shrank an annual 3.2 percent from a year earlier, the federal statistics office said.

RADHIKA RAO, ECONOMIST, FORECAST PTE, SINGAPORE

"Contraction in July IP is disappointing though validates that the production sector remains in doldrums. Note also the sharp 28 percent drop in capital goods production, which continues to distort the headline print.

"Data will pile pressure on the new finance minister to jump start the reform process and revive investment interest, which is likely to be a key drag on overall growth heading into H2. On policy, RBI has made it clear that a rate cut at this juncture would stoke inflation risks rather than support growth on a sustained basis; this data is unlikely to have a material impact on the policy direction unless New Delhi addresses some of the structural growth constraints."

RUPA REGE NITSURE, CHIEF ECONOMIST, BANK OF BARODA, MUMBAI

"It's pointing to a very serious slowdown versus 5.7 percent growth in the first quarter of FY12. Low investments, contracting exports and weak monsoons will drag India's GDP growth below 5 percent for FY13. Pressures will now mount on RBI to ease monetary policy, though a firm fiscal action is more relevant for reviving investments in a sustainable fashion."

DARIUSZ KOWALCZYK, ECONOMIST, CREDIT AGRICOLE CIB, HONG KONG

"The data bodes ill for Q2 (FY Q1) GDP growth which may well remain below 6 percent year-on-year. It highlights continued softness of the Indian economy amid contracting exports and weaker domestic demand. The data is likely to facilitate a rate cut soon, and we continue to expect 50 bps this year."

ROBERT PRIOR-WANDESFORDE, ECONOMIST, CREDIT SUISSE, SINGAPORE

"The emphasis of the Indian central bank will still be on inflation. We have seen this kind of weakness in growth for sometime, and the Reserve Bank of India has been ignoring it. History suggest that they will continue their focus on inflation."

ANUBHUTI SAHAY, ECONOMIST, STANDARD CHARTERED BANK, MUMBAI

"This is yet another reminder of growth woes and will be drag on April-June gross domestic product data. However, with inflation still at elevated levels and increased upside risk on less than adequate monsoon, any rate cut is unlikely to come soon."

KUMAR RACHAPUDI, FIXED INCOME STRATEGIST, BARCLAYS CAPITAL, SINGAPORE

"The number was weaker than expected, much lower than consensus and our forecasts. It is unlikely that we will see a material turnaround in the near term given that headwinds of low confidence and high interest rates remain along with disruptions (such as Maruti and power supply disruptions) in July. This number will likely result in market increasing expectations of a rate cut. We continue to recommend long bonds."

SHAKTI SATAPATHY, FIXED INCOME STRATEGIST, A K CAPITAL, MUMBAI

"The data reiterates broad based slowdown across key sub indices and calls for a fiscal led growth revival strategy followed by monetary easing in the coming months.

"Though the favourable base impact might support the output data in the coming months up till November, the recent power outage and delay in government's growth revival action plan would keep it subdued.

"We further expect the lending rate repricing in the coming weeks by majority of the lending institutions would have a positive bearing on the consumer durable segments."

INDRANIL PAN, CHIEF ECONOMIST, KOTAK MAHINDRA BANK, MUMBAI

"Significant dip in the capital goods numbers have pulled down the manufacturing numbers. However, we think that the erosion in the IIP is unlikely to be significant from hereon and there should be some technical bounce coming back with the low base of the last year kicking in soon. Overall, this low number is unlikely to be a clincher for the RBI in terms of its rate decision."

SUJAN HAJRA, CHIEF ECONOMIST, ANAND RATHI SECURITIES, MUMBAI

"The growth scenario, and particularly the investment scenario for 2012/13 looks grim. If the monsoons remain weak, we see gross domestic product growth of 5.4 percent for the fiscal. The Reserve Bank of India's first priority remains controlling inflation, and unless they achieve some success there, they will not ease interest rates."

SHUBHADA RAO, CHIEF ECONOMIST, YES BANK, MUMBAI

"The declining momentum is gathering pace. Unless there is a policy impetus, industrial production will be in a de-growth mode.

We expect the April-June gross domestic product growth to be around 5.0-5.5 percent.

"The Reserve Bank of India may have to bring growth into their monetary policy stance, may be as early as September."

MARKET REACTION

* India's benchmark 10-year bond yield eased 2 basis points to 8.10 percent after the factory data.
* The BSE Sensex trimmed gains to trade up 0.2 percent from 0.4 percent beforehand.
* The benchmark five-year OIS rate dropped 2 basis points to 7.06 percent.
* The partially convertible rupee trimmed gains to 55.18 per dollar from 55.08 beforehand.

BACKGROUND

- P. Chidambaram, India's new finance minister, sought on Monday to allay investor worries about an economy growing at its weakest pace in almost a decade by pledging to address their concerns over taxes, public finances and interest rates.

- A summer drought makes a bad situation worse for an Indian economy already crippled by a sharp slowdown in growth, persistent inflation and a politically hamstrung government.

- More economists slashed their economic forecasts for India, with Citigroup and CLSA cutting their outlooks for growth to 5.4 percent and 5.5 percent respectively in the fiscal year ending March, with a weak monsoon adding to economic headwinds.

- Citigroup said a policy gridlock, recent power outages, weaker exports and falling domestic consumption will take a toll on Asia's third-largest economy.

- On Tuesday, rating agency CRISIL cut its growth forecast to 5.5 percent for the fiscal year ending March, just two months after pruning its projection to 6.5 percent from 7 percent.

- Growth faltered to a nine-year low of 5.3 percent in the March quarter, due to stalled economic reforms and higher interest rates.

- The Reserve Bank of India left interest rates unchanged in July for the second straight review, showing that bringing down stubbornly high inflation is its top priority even as economic conditions deteriorate.

- The main gauge of inflation, the wholesale price index, likely grew 7.37 percent year-on-year in July, compared with 7.25 percent in June, a Reuters poll showed.

(Agencies)

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