India's industrial activity expected to cool: HSBC

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"Clearly, industrial activity has cooled and, in our view, will continue doing so as the lagged effects of the interest rate tightening and currency appreciation bite, while weaker domestic growth in the developed world and higher oil prices also take their toll," HSBC's Robert Prior-Wandesforde said in the note.

India's industrial output rose 7.6 percent year-on-year in December, accelerating from the previous month's downwardly revised 5.1 percent, helped by stronger manufacturing, official data released earlier in the day showed.

But, it is significantly lower from 12.4 percent in April, which was the beginning of the fiscal year 2007/08. India follows the April-March fiscal year.

The slowdown in industrial growth is limited to the consumer side, though capital goods remain resilient. "So far the industrial slowdown has been confined largely to the consumer side, where durables production has been particularly weak, while capital goods has remained extremely resilient," HSBC said.

"From a policy perspective, assuming the February Budget is not too expansionary and the underlying slowdown continues as we expect, then the central bank is likely to ease rates," Prior-Wandesforde said.

"The commercial banks are perhaps partly anticipating this via their recent reductions in lending rates," he added.

The Indian central bank raised its short-term lending rate by 125 basis points in five moves between June 2006 and March 2007. It has raised the cash reserve ratio for banks by 250 basis points since December 2006.

The rupee strengthened more than 12 percent in 2007, driven up by capital flows into Asia's third-largest economy.

"If the Indian economy is to continue slowing, then, from the perspective of the country's long-term growth prospects, it would better if the consumer bore the brunt rather than investment spending," HSBC said.