Reuters New Delhi, December 12, 2011 India's industrial output contracted 5.1% in October from a year earlier, government data showed on Monday, much sharper than a median forecast in a Reuters poll for 0.5% fall. Manufacturing output, which constitutes about 76% of the industrial production, fell an annual 6%, the federal statistics office said in a statement. During April-October, industrial production expanded 3.5%. Output grew 7.8% in the 2010/11 fiscal year that ended in March, slower than the 10.5% clocked in the previous year. COMMENTARY: ROBERT PRIOR-WANDESFORDE, SOUTH-EAST ASIAN ECONOMIST, CREDIT SUISSE, SINGAPORE "It's the sort of number that you would imagine would make them sit up and take notice. However, (RBI Governor Duvvuri) Subbarao has made it crystal clear he is still heavily focused on inflation, in that sense the November WPI number will be perhaps more important than this number. "We think WPI, and the market now thinks, that WPI inflation is going to show its first meaningful decline in about 18 months, and that therefore this is going to be a very dovish week for India -- does that mean we are going to get a cut at the next meeting? I very much doubt it, I think they will want to see, a), if this is just a temporary blip and, b), they would want to see if they get further slowing in WPI inflation." JAGANNADHAM THUNUGUNTLA, HEAD OF RESEARCH, SMC GLOBAL SECURITIES, NEW DELHI: "The IIP numbers are a clear indication of the fact that the slowdown has taken deep roots in the Indian economy. Against this backdrop, I think expectations of 7% GDP growth this year would be very, very optimistic. "Despite this, I expect the central bank to give some indication of rate cuts early next year rather than later this week. The stock market has been coping with so many headwinds and this adds to the overall macro-economic worries." DARIUSZ KOWALCZYK, SENIOR ECONOMIST AND STRATEGIST, CREDIT AGRICOLE CIB, HONG KONG: "The data shows weakening of the Indian economy. It should pressure down the INR and INR OIS rates, especially at the short end of the INR OIS curve. It increases the odds of a major shift in RBI language on Friday. We see rate cuts in 2012 but there is a small chance of a cut this week." TIM CONDON, HEAD OF ASIAN ECONOMIC RESEARCH, ING, SINGAPORE: "It is a lot worse than we expected. The nearly two years of monetary tightening is clearly being felt. While India may not be a manufacturing-driven economy, more data prints such as this would be a worrying sign. While we expect a status quo in terms of interest rates from the RBI this week, the pressure is clearly building on them to start easing." BACKGROUND: - India slashed its full-year growth forecast on Friday amid slowing domestic and global demand, with officials warning the government was facing a serious balance of trade problem and will have a tough time meeting its fiscal deficit target. - The economy grew 6.9% in the quarter through September, its weakest pace in more than two years. - The Reserve Bank of India (RBI), which reviews policy on Friday, is expected to pause its tightening cycle because of slowing growth, after raising rates 13 times since early 2010 to control inflation that has stayed above 9 percent for nearly a year. - Headline inflation likely eased in November to 9.04% from 9.73% the month before as food prices fell to their lowest in nearly three-and-a-half years, a Reuters poll showed. The data is due on Wednesday. - The RBI expects inflation to ease to 7% by March. - Manufacturing sector expansion slowed in November as factory output grew at its slowest pace in nearly three years although export demand should provide some cheer for factories, a HSBC Markit survey showed. - India's services sector expanded in November for the first time in three months as new business accelerated despite persistent inflationary pressures. - Car sales rose 7% in November from the same month a year earlier, the first monthly rise in five, an industry body said on Thursday, as the industry rebounded strongly from the biggest fall in over a decade the month before. - A slowing economy is squeezing federal finances and the government's ability to restrict the fiscal gap for the 2011/12 financial year at the budgeted level of 4.6% of gross domestic product.