By Rahul Karunakar
BANGALORE (Reuters) - Indian factories' output probably rose for a third consecutive month in March, boosted modestly by improving exports and investment, but weak domestic demand prevented a more significant recovery, a Reuters poll found.
The median forecast from a poll of 26 economists showed production at factories, mines and utilities probably rose an annual 2.0 percent, after a 0.6 percent rise in February.
If that March consensus is realised it would mean output grew for three months in a row after shrinking in eight months last year, suggesting a moderate recovery in Indian factories.
"Industrial production will recover slowly through the year led by a further improvement in exports," said Robert Prior-Wandesforde, director of Asian economics at Credit Suisse.
"And not because of some sort of non-consensus strong global recovery view, but on lagged effects of the rupee depreciation."
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While the rupee is up nearly 2 percent against the dollar so far this year, it had depreciated by nearly 4 percent in 2012 and by 15.6 percent in 2011 when it was one of Asia's worst performing currencies.
India's exports rose for the third straight month in March, offering some relief to the high current account deficit, which hit an all-time high in the quarter to December.
Output in the country's eight key infrastructure industries, which make up almost 40 percent of factory production, rose an annual 2.9 percent in March after contracting 2.4 percent in February.
Encouragingly, capital goods output, a key barometer of investment, rose an annual 9.5 percent in February.
But consumer demand is expected to remain tepid and weigh on the recovery in Indian factories.
Car sales -- a proxy for domestic consumer demand -- fell for the fifth straight month in March. The overall fall in the 2012/13 fiscal year ending in March was the first in a decade.
Although, the HSBC manufacturing survey for March and April showed weak factory activity, the April PMI showed a jump in export orders, underlining the improvement in foreign demand for Indian goods.
That augurs well for Asia's third-largest economy, which is struggling to recover after growing in 2012/13 at its slowest rate in a decade.
To help pull the economy out of the slump, the Reserve Bank of India last week cut its benchmark policy rate by 25 basis points for the third time this year, to 7.25 percent, but was cautious about further policy easing.
"As far as the RBI is concerned, we are getting close to the end of the easing cycle. It is possible that the RBI may shoot another salvo but that could potentially be it," said Leif Eskesen, HSBC's chief economist for India.
(Polling by Ruby Cherian; Editing by Simon Cameron-Moore)