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India factory output shrinks in March

Indian industrial production unexpectedly contracted in March as weaker domestic demand and tumbling exports hurt the economy, undermining the central bank’s efforts to shore up a sliding rupee.

Production at factories, utilities and mines declined 3.5% from a year earlier, the Central Statistical Office said in a statement in New Delhi today, compared with a 4.1% increase in February. The median of 32 estimates in a Bloomberg News survey was for a 1.7% gain.

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 have pushed the nation’s currency toward a record low, prompting the central bank to say yesterday exporters must convert half their foreign-currency earnings into rupees as it stepped up efforts to check the decline.

Ms Radhika Rao an economist at Forecast Pte in Singapore said that “The contraction in output data reconfirms weakening demand both domestically and externally. Even though growth is slowing, from the policy perspective, the focus will be more on inflation, especially due to the impact of the huge decline in the rupee on prices.”

The central bank lowered interest rates last month for the first time since 2009, by 50 basis points to 8 percent, to bolster spending at home. It also flagged price pressures from the fiscal deficit, energy costs and a weaker rupee.

Central bank Deputy Governor Subir Gokarn said that “We are in a scenario where the tendency for interest rates is going to be downwards. The pace and the magnitude is obviously going to be determined by how inflation goes but the direction is now fairly evident.”

The deputy governor also said the monetary authority will continue to try and curb volatility in the rupee.

Manufacturing contracted 4.4% in March from a year earlier after a 3.9% advance in February report showed. Mining fell 1.3% compared with a 2.7% gain in the previous month. Electricity output rose 2.7%.

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