REFILE-UPDATE 1-India's industrial output shrinks in Sept, consumer prices rise

Last Updated: Mon, Nov 12, 2012 09:00 hrs

(Refiles to correct date in first paragraph)

* Industrial output shinks 0.4 pct yr/yr

* Manufacturing output falls 1.5 pct

* Consumer price inflation rises to 9.75 pct yr/yr in October

* Wholesale price data due out Wednesday, seen showing inflation at 11 month high

NEW DELHI, Nov 12 (Reuters) - India's industrial output unexpectedly contracted on weak consumer demand in September, adding to pressure for action by the government with Asia's third largest economy increasingly likely to post its slowest growth in a decade.

Data released by the Central Statistics Office (CSO) on Monday showed output at factories, mines and utilities shrank an annual 0.4 percent. That was sharply in contrast with a forecast of 2.8 percent growth in a Reuters poll.

Manufacturing output, which accounts for the bulk of industrial production and contributes about 15 percent to overall GDP, fe ll 1.5 percent in September from a year ago.

India's festival season, which began in September and will peak this month, was expected to bolster the output data. The sharp slump in output will bolster calls for an interest rate cut from the Reserve Bank of India to perk up the economy.

"Typically, some kind of inventory buildup also happens in September, so the numbers are all the more disappointing," said Anjali Verma, an economist with MF Gobal in Mumbai.

"Going by RBI's guidance, the IIP numbers will now make a strong case for a rate cut to happen in January."

The central bank has so far rebuffed calls for interest rate cuts, saying prices are still rising too fast to risk loosening policy much, and it also wants the government to bring down a worryingly high fiscal deficit. The bank says rising rural wages, a result of government policies, are also stoking inflation.

The next monetary policy review is due in December. The central bank has said any interest rate cut is "highly improbable" at that meeting, since it expects price pressures to remain elevated following a hike in the price of heavily subsidised diesel in September.

Reinforcing the central bank's expectations on inflation, the consumer price index rose an annual 9.75 percent in October, a tad faster than 9.73 percent rise a month ago, more government data showed on Monday.

October wholesale price index data, which the Reserve Bank of India gives more weight to in setting policy, is due to be released on Wednesday. A Reuters poll of economists showed wholesale price inflation was seen accelerating to 7.96 percent, an 11-month high.

The 1-year overnight index swap (OIS) rate fell around 3 basis points to 7.73 percent after the data. The 5-year OIS rate fell 3 basis points to 7.12 percent, according to dealers.

The 10-year bond yield was down 1 basis point to 8.21 percent.

Finance Minister P. Chidambaram told Reuters last week that growth for this financial year could be as low as 5.5 percent, which would be the slowest rate of expansion since 2002/03.

The government and businessmen have been pleading with the Reserve Bank of India (RBI) to lower interest rates, which are the highest among the major economies. (Reporting by Arup Roychoudhury; Editing by Simon Cameron-Moore)

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