India's industrial output growth probably slowed to an annual rate of 3.5 percent in September, weighed down by slower growth in infrastructure output and higher domestic borrowing costs, shows a Reuters poll.

India's manufacturing PMI, a fairly reliable gauge of the official data, fell to 50.4 in September, the lowest since March 2010 and perilously close to the 50 mark that divides growth from contraction.

The forecasts from a poll of 27 analysts ranged from 1.7 percent to 6.0 percent, with a majority - 22 of 27 - expecting output to be below the 4.1 percent growth level registered in August. Infrastructure output growth slowed to an annual rate of 2.3 percent in September from a revised 3.7 percent in the previous month.

The three-month moving average measure of the manufacturing PMI in September also signalled a slowdown in new business orders, though the unexpected bounce in October signalled modest recovery in activity amongst local businesses, said Radhika Rao, economist at Forecast Pte in Singapore.

Industrial

Industrial Growth

Analysts expect the industrial sector to cool further in coming months as higher borrowing rates and faltering domestic and external demand hurt profitability.

Economic turbulence in the United States and Europe, India's top sales destinations, has prompted trade ministry warnings of a slowdown in export growth for the remainder of the fiscal year ending March 2012.

FACTORS TO WATCH

* The HSBC Markit India Manufacturing PMI rebounded for the first time in six months to 52.0 in October from 50.4 in September, boosted by rising domestic orders for new business.

* Manufacturing activity took a hit globally with October PMI surveys pointing to slower growth or contraction in the euro zone, United States, China, Britain and Canada.

* India's October exports grew just 10.8 percent in October to $19.9 billion, compared with a 36 percent rise in September, as weak economic conditions in the euro zone slowed demand for items such as electronics, cars and precious stones from India.

* In an acknowledgement of mounting risks to economic growth, the Reserve Bank of India (RBI) last month signalled a pause in its rate tightening cycle after raising interest rates 13 times since March 2010 to control inflation that has stayed above 9 percent for nearly a year.

* The RBI also scaled back its growth forecast for the current fiscal year ending in March to 7.6 percent from 8 percent earlier.

* Annual car sales decline about 24 percent in October, the biggest monthly fall since December 2000, as high interest rates and vehicle costs drove down sales.

* A slowing economy is squeezing government finances and putting a question mark on the government's ability to restrict the fiscal gap for the 2011/12 financial year at the budgeted level of 4.6 percent of gross domestic product.

MARKET IMPACT

* A reading between 3.5 and 4.5 percent is unlikely to impact the market, traders said.

* A reading above 5 percent could push the one-year overnight indexed swaps (OIS) rate higher by 2 to 4 basis points and the five-year rate up 3 to 5 basis points. Government bond yields are likely to rise 2 to 3 bps.

* A print below 3 percent could see a fall in yields and OIS rates by a maximum of 4-5 bps, dealers said.

* Inflation data for October due on Monday will be more crucial for the market in order to gauge the likely impact on the central bank's policy direction, they said.