Factory output contracted by 2.4 per cent in July in its worst performance in eight months while retail inflation cooled to five-month low of 5.05 per cent, reviving hopes for a rate cut by RBI to boost growth.

The official data released on Monday showed that the retail inflation fell below the 6 per cent level, largely on account of a slower rate of price increase in vegetables, food and beverages, from nearly a two-year high of 6.07 per cent in July.

The latest reading of price rise, based on the consumer price index (CPI), is the lowest since March 2016 when it stood at 4.83 per cent. In August 2015, it was 3.74 per cent. Registering a dismal show, industrial production shrank 2.4 per cent in July, the lowest level in eight months, due to a declining output in manufacturing and capital goods sectors.

On a cumulative basis, the factory output in April-July dropped by 0.2 per cent compared with 3.5 per cent growth in the year-ago period. Enthused by easing retail inflation, Economic Affairs Secretary Shaktikanta Das exuded confidence that RBI will take into account improvement in the price situation while deciding on a rate cut in its next policy review due on October 4.

"With regard to the rate cut, there is a direct relationship between the inflation figures and policy rates of the Reserve Bank. So, inflation has moderated as expected. I would therefore expect RBI to take this into consideration and take its call... I'm sure they will consider all the aspects and take a call," Das told reporters.

On the twin macroeconomic data, an industry chamber said, "We look forward to calibrated policy measures from RBI in terms of reduction in policy rates. We also look forward to increase in public investments by the government to help domestic demand revive." According to IIP data, the previous low was witnessed in November last year when the factory output shrank by 3.4 per cent. Factory output, measured in terms of the index of industrial production (IIP), had grown by 4.3 per cent in July last year.

According to data, IIP growth for June was revised downwards to 1.95 per cent, from a provisional estimate of 2.1 per cent released last month. Referring to IIP numbers, Das said, "It is certainly a matter of concern, but let us also remember that the IIP data is a sample of 400 companies. So, they are not truly reflective of the state of affairs... the numbers which are in the negative zone... do not reflect the full picture."

The official IIP data released today showed that the manufacturing sector, which constitutes over 75 per cent of the IIP index, declined by 3.4 per cent in July compared with 4.8 per cent growth a year ago.
In terms of industries, 12 out of 22 industry groups in the manufacturing sector showed negative growth in July. The capital goods output registered a steep decline of 29.6 per cent in the month against a growth of 10.1 per cent last year.

Power generation recorded a growth of 1.6 per cent in July as against 3.5 per cent in the same month a year ago. The mining sector grew 0.8 per cent in July against a growth of 1.3 per cent a year ago. Growth in output of consumer durables decelerated to 5.9 per cent in July, from 10.5 per cent a year ago.

The consumer non-durable goods output declined by 1.7 per cent in July against 4.4 per cent contraction a year before. Overall, consumer goods production recorded a growth 1.3 per cent in July compared with 1.1 per cent a year ago. As per use-based classification, the growth rates in July 2016 are 2 per cent in basic goods and 3.4 per cent in intermediate goods over July 2015.

For April-July, manufacturing sector's output showed contraction by 1.4 per cent as against a growth of 4 per cent a year ago.

Production of capital goods, which are considered as a barometer for investment, declined 21.3 per cent in the four-month period compared with a growth of 4.2 per cent in year-earlier period.