India's industrial output picked up more than expected in May, bolstering the case for the Reserve Bank of India (RBI) to keep interest rates high at its next policy meeting as a slow start to the monsoon puts pressure on inflation, especially food prices.


An employee works inside a tea producing factory at the Amchong tea estate in Assam July 11, 2012.

Industrial production rose 2.4 percent in May from a year earlier, driven by manufacturing growth, data released on Thursday showed. The number, which was ahead of a Reuters poll forecast for an 1.8 percent increase, was the largest growth in output since February.

India's industrial output data is volatile -- the government revised last month's number to a 0.9 percent contraction after initially coming in flat. But IIP is nevertheless taken as a barometer of economic growth, which fell to 5.3 percent in the quarter up to March, the slowest pace in nine years.

Analysts greeted the number as moderately positive but said the RBI would pay more attention to wholesale price inflation published next week when deciding monetary policy at a July 31 meeting.

Today's number is better than last month's but it does not signal that we are in the middle of an upturn, said Sanjay Mathur, head of research and strategy at RBS in Singapore.

Unambiguously, it is a weak number for a domestic demand-driven economy like India. With the Reserve Bank of India looking at fighting inflation, it is likely to hold its rates steady in the July review.

Capital goods, a key investment indicator that has shown growth only once in the past 9 months, slumped 7.7 percent in May.

Prime Minister Manmohan Singh, a veteran economist, took charge of the finance ministry last month vowing to revive the economy's 'animal spirit' by attracting investment and speeding up infrastructure and power projects.

India's battered stock market and rupee have performed better since Singh took over the ministry, with investors hopeful he can usher in economic reforms and reduce last year's gaping 5.8 pct fiscal deficit.

The Sensex gained 7.5 percent in June compared with a 3.5 percent gain in the MSCI Asia-Pacific ex-Japan index. The rupee has gained 3.5 percent since sinking to a record low of 57.32 against the dollar on June 22.

Markets showed little reaction to the industrial output. As of 11:25 a.m. India time (0555 GMT), the Indian rupee had weakened to 55.66/68 per dollar from around 55.58 before the data, tracking weaker global markets.

Battling stubbornly high price rises, the Reserve Bank of India resisted pressure from banks and businesses to cut its key repo rate from 8 percent last month and may again stick to its guns at its end-of-the month meeting.

India's Wholesale Price Index, the benchmark inflation indicator, is published on Monday for June. A Reuters poll predicted June inflation hitting a 2012 high of 7.62 percent, with lower global oil prices likely to be offset by a large jumps in the cost of potatoes and tomatoes because of delayed rainfall.

Manufacturing, which constitutes nearly 76 percent of industrial output, grew 2.5 percent in May from the year-ago period, Thursday's data showed.