India's annual industrial output growth probably slipped further in June to 5.5 percent from a nine-month low of 5.6 percent in May, indicating taut monetary policy and soaring inflation were hindering growth momentum, the median forecast in a Reuters poll showed.

The forecasts, from 23 analysts, ranged from 3.8 percent to 7.7 percent.

The Reserve Bank of India (RBI) raised key interest rates by a steeper-than-expected 50 basis points last month, the 11th increase since March 2010 that are now starting to drag growth.

Analysts say a series of rate increases has hit growth in manufacturing, which constitutes nearly 80 percent of the overall industrial output.

"(The) elevated level of interest rates is likely to restrict the investment growth rate and thereby the overall (industrial production) growth in near future," said Dr. Arun Singh, senior economist at Dun & Bradstreet.

"High input prices as well as borrowing costs at a time when manufacturers are finding it difficult to raise selling prices, anticipating subdued demand conditions, is likely to keep the overall (production) subdued going forward."

A gathering global slowdown in demand, led by worries that the United States is at risk of falling back into recession, has clouded the outlook for Asia's third-largest economy.

A separate Reuters poll on Tuesday showed there is a one-in-four chance that it may happen.

Private surveys of business, which are more timely than the official statistics, are pointing a further slowdown in Indian industrial production.

The HSBC Markit Purchasing Managers' Index fell sharply for a third straight month to 53.6 in July, its lowest since November 2009, suggesting the slowdown has persisted.

 

FACTORS TO WATCH

* Indian exports rose an annual 46.5 percent in June to $29.2 billion and the trade deficit stood at $7.7 billion, government data showed this month.

* India's infrastructure sector output grew 5.2 percent in June from a year earlier, slower than 5.3 percent in May, government data showed.

MARKET IMPACT

* The yield on government bonds may fall or rise 4-5 basis points if the reading comes sharply below or above the forecast.

* The overnight indexed swaps (OIS) could mirror the government bond market, depending on how much of a surprise or shock the number throws up.

* The 1-year OIS rate was at 7.50 percent, below the central bank's main lending rate of 8 percent, suggesting that the market was expecting a pause in the rate tightening cycle.

* Inflation data due next Tuesday will also be critical to form expectations around the Reserve Bank of India's Sept. 16 policy review.