India's industrial output increased by 2.4 percent in January after contracting by 0.6 percent (revised from 0.5 percent) in December, as the manufacturing activity picked up following an increase in power production, the official data released Tuesday showed. Reuters’ analysts estimated 1.2 percent growth rate in January.

Factory output measured by the Index of Industrial Production (IIP) had recorded 1 percent growth same month, a year ago.  

The unexpected boost in the industrial activity after two straight months of contraction has raised hopes of improvement in the economic sentiment, in Asia’s third largest economy.

The cumulative growth in IIP in the April-January period of 2012-2013 stood at 1 percent in comparison to the 3.4 percent registered in the same period, a year ago.

The manufacturing sector that contributes to 76 percent of the industrial production grew by 2.7 percent compared to the 1.1 percent registered in the same month last year, according to the data released by the Central Statistics Office of the Ministry of Statistics and Program Implementation. However, mining sector and capital goods declined by 2.9 percent and 1.8 percent respectively in January.

Power generation increased by 6.4 per cent in January compared to 3.2 per cent growth in January, 2012, which has helped increase the industrial production.

''The improvement in IIP is sentimentally positive and can be mainly attributed to a pickup in manufacturing activity and electricity production. But the capital goods index contracted for the third straight month despite a favorable base so weakness in the investment cycle clearly continues to persist,” Bhupali Gursale, economist, Angel Broking told IRIS.

Reacting to the IIP data the government and industry bodies said that the positive data indicates signs of recovery but pointed out that further stimulus is needed to boost the economy.

“While some signs of revival of industrial activity are indicated, it is too early to assume that the slowdown has bottomed out and green shoots of recovery are around the corner. If we factor in the base effect, the performance of industry is still below potential. But we hope that the growth in industry, though modest, would signal a beginning of a turnaround and we would expect much better figures, going forward,” Adi Godrej, President, CII said in a statement.

Industrial experts believe that the moderation in headline inflation to 6.62 percent in January would prompt the Reserve Bank of India to cut rates at its mid-quarter review of monetary policy Mar. 19. 

"Inflation numbers have also come down so there is certainly a case for (giving) further impulses for growth," Department of Economic Affairs (DEA) Secretary Arvind Mayaram told reporters, the Press Trust of India (PTI) reported.

 In January, RBI had cut policy rates by 25 basis points for the first time in nine months to boost growth as inflation showed signs of moderation.