Indian industrial output slows as rate hikes bite

India's annual industrial output slowed a to a much lower-than-expected 5.6 percent in May, official data showed on Tuesday, in a further sign that Asia's third-largest economy is losing steam. The 5.6 percent growth in production by factories, mines and utilities was the weakest in nine months and sharply undershot forecasts of around 8.5 percent. With inflation still running at a stubbornly high nine percent and price pressures spreading from food and energy to manufacturing, analysts said they expected the central bank to raise interest rates again later this month. The hike would be the 11th since March 2010. "The central bank has made it quite clear it is prepared for lower growth in pursuit of lower inflation," Brian Jackson, senior emerging markets strategist at Royal Bank of Canada in Hong Kong, told AFP. Jackson forecast a 25 basis point hike when the central bank meets on July 26 and a total of 50 basis points through the three months to September. The output figures spelled more bad news for Prime Minister Manmohan Singh, who on Tuesday reshuffled his Congress-led government after months of bad publicity over corruption scandals. May's output figure was down from 8.5 percent in the same month a year ago, and a revised 5.8 percent in April, and showed the aggressive rate hikes to tame inflation were putting the brakes on economic performance, analysts said. The latest figures were compiled using a new index with an updated base year of 2004-05 aimed at more accurately reflecting output trends. Under the old index, India's industrial output was even worse at 3.6 percent year-on-year growth -- down from 12.2 percent the previous year. Dragging down the index was a slowdown in automobile and textiles production. The data came a day after industry figures showed the country's car sales grew just 1.26 percent last month, their slowest pace in more than two years, as high rates and rising fuel costs deterred buyers. The government is expected to lower its growth forecast for 2011-12 from nine percent to around 8-8.5 percent -- still higher than most private economists' expectations, which range as low as 7.5 percent. While growth of 7.0-8.0 percent would be envied by Western economies, experts say India needs at least 10 percent expansion to lift hundreds of millions of people out of crushing poverty.