India's industrial output drops to 26-month low as rate hike hits demand

India's annual industrial output contracted 4% in October, its weakest performance in 26 months, after revised growth of 3.5% in September, data released on Monday showed, as rising interest rates and slowing global growth dampened consumer demand.

Analysts polled by Reuters had expected expansion of 0.3% in October. The 4% contraction was the biggest since August 2020 when it had contracted 7.1%, based on Refinitiv data.

The Reserve Bank of India has raised its policy rate by 225 basis points to 6.25% since the start of the tightening cycle in April, as it battles to contain inflation.

Sluggish rural spending and rising borrowing costs have started hitting consumer demand for durables and impacted manufacturing, which accounts for about 16% of the Indian economy.

"It appears that weak domestic demand in combination with waning of export demand is impacting the industrial output growth," said Devendra Pant, chief economist at India Ratings, the Indian arm of Fitch ratings.

Economists said despite an easing of headline retail inflation to 5.9% in November, the central bank was likely to raise its policy rate by 25 basis points in February.

Merchandise exports in October fell 16.6% to $29.78 billion from a year earlier as exporters of engineering, textile and agricultural goods faced declines in global demand and prices.

Infrastructure output, which comprises eight sectors including coal and electricity accounting for nearly 40% of industrial output, rose just 0.1% year-on-year in October, data released by the Ministry of Commerce earlier showed.

BROAD-BASED SLOWDOWN

Industrial output growth in Asia's third largest economy has sharply slowed, expanding 5.3% during the April to October period compared to 20.5% a year before.

In October, manufacturing contracted 5.6% year-on-year compared with a 2.2% expansion in the previous month, data released by the Ministry of Statistics on Monday showed.

Mining output rose 2.5%. Consumer durables output shrank more than 15% in the same month, data showed.

Among products, the auto sector grew 12.3%, but electronic goods production contracted 12.3% and apparel manufacturing shrank more than 37% in the same period.

Analysts said that slowing factory output could also hit jobs and private investment was not picking up as reflected in the disappointing performance of capital goods output - which contracted 2.3% year-on-year in October.

In November, India's unemployment rate rose to 8.0%, the highest in three months, while the urban unemployment rate increased to 8.96%, according to Mumbai-based Centre for Monitoring Indian Economy.

"Future prospects look not so positive as we move to the end of the festival months," said Madan Sabnavis, chief economist at the state run lender, Bank of Baroda.