India's industrial output unexpectedly contracted 3.5% in March, government data showed on Friday.
Analysts had expected output to grow 1.5%, a CNBC-TV18 poll showed. The March figure compares with February's annual increase of 4.1%.
The Sensex and the rupee extended falls after factory output unexpectedly contracted in March from a year earlier, though any further declines may be capped given traders usually do not usually put too much stock on the volatile data.
(More on market reaction here)Even eminent economists like C Rangarajan were taken aback by the astonishing number. "I had not expected a contraction in industrial output. It is very disappointing," he told
CNBC-TV18 in an interview.
Manufacturing, which constitutes about 76% of industrial production, shrank an annual 4.4% from a year earlier, the statistics office said.
The overall output grew 2.8% in the fiscal year that ended on March 31, much slower than 8.2% in the year-ago period.
India's economy, once a key driver of growth in Asia, has slowed considerably due to surging inflationary pressures, which have resulted in high interest rates.
Growth prospects for the Indian economy have been consistently downgraded. Economists polled by Reuters cut their gross domestic product forecasts for the fifth straight quarterly poll in April.
Annual exports fell in March for the first time in four months as demand from key trade partners, Europe and the United States, weakened.
However, there are a few bright spots in the faltering Indian growth story that might boost the industrial output number ahead.
An uptick in both the manufacturing and services purchasing managers' index numbers for April offers room for optimism. So does the surprisingly sharp rate cut by the central bank at its April meeting in an effort to boost the slowing economy.
Dariusz Kowalczyk, economist, Credit Agricole CIB says "The contraction was driven by particularly poor performance of the manufacturing sector, in line with weak exports that month.
"We believe that April saw a turnaround, but until this is confirmed, sentiment will be weak. The data increases the odds of another rate cut, is negative for the rupee, and should push rupee OIS rates and bond yields down," he adds.
Meanwhile, India's
inflation rate probably eased only slightly in April, held firm by food prices, underscoring the RBI's stance that it had little room for further rate cuts, a Reuters poll found.
According to Rangarajan, the central bank will consider inflation before moving rates further. He expects inflation to come a little below 7% next week or so. "I think the monetary policy easing will depend on inflation trajectory," he says.
The Reserve Bank of India slashed its main lending rate -- the repo rate -- by a sharper-than-expected 50 basis points in April to help revive growth.
Saugata Bhattacharya, economist, Axis Bank says "The IIP (index of industrial production) number will not lead to a knee-jerk reaction from the Reserve Bank of India. I don't think there will be a reduction in interest rates in June."
"RBI will wait for other indicators like inflation, and also the global crude oil prices and reform measures taken by the government before deciding on rate cuts."
(With inputs from Reuters) 
