New Delhi, Sep 13 (PTI): Industrial production grew 2.6 per cent in July, expanding for the first time in three months, on improved performances in the manufacturing and power sectors, raising hopes of a recovery and expectations the RBI will cut interest rates to boost consumer demand.

Factory output measured in terms of the Index of Industrial Production (IIP) had contracted 0.1 per cent in July last year. It had dipped 1.78 per cent in June and 2.8 per cent in May this year.

"It's good news. It indicates a revival in industrial growth. I believe the phase of negative growth is coming to an end. Growth will pick up in coming months," said C. Rangarajan, Chairman of the Prime Minister's Economic Advisory Council.

Commenting on the data, CII Director General Chandrajit Banerjee said, "This is welcome, though it is too early to presume that a recovery is under way...In the very short term, of course, an easing of benchmark rates by the RBI would provide the much needed demand traction which has been ailing segments like consumer durables."

As per data released by the Central Statistics Office on Thursday, the IIP contracted 0.2 per cent during April-July.

The manufacturing sector, which constitutes over 75 per cent of the index, grew 3 per cent in July compared with zero growth a year earlier.

During April-July, the sector saw a decline of 0.2 per cent compared with a contraction of 0.6 per cent in the period last year. Power generation increased 5.2 per cent in July from growth of 2.8 per cent in the same month in 2012.

Electricity output in April-July grew 3.9 per cent compared with 5.5 per cent a year earlier. Output of capital goods, a barometer of demand, grew 15.6 per cent compared with a 5.8 per cent decline in the same month a year earlier. During April-July, capital goods production grew 1.8 per cent compared with a drop of 16.8 per cent in same period last year.

Among the 22 industry groups in the manufacturing sector, 11 recorded positive growth in July.

"The economic situation is expected to improve in the ensuing months on moderating inflationary expectations and various reform measures undertaken by Government and Reserve Bank of India," said Suman Jyoti Khaitan, President of the PHD Chamber of Commerce & Industry.

Meanwhile, mining output declined 2.3 per cent in July, compared with a dip of 3.5 per cent. In April-July, the sector declined 4 per cent compared with a contraction of 2 per cent in the corresponding period.

"Government needs to take some bold measures like reducing interest rates further, fast-track implementation of large projects like industrial corridors and through pro-active government procurement policies," FICCI Secretary General Didar Singh said.

Consumer goods output contracted 0.9 per cent in July, compared with growth of 0.7 per cent a year earlier. Production of these goods declined 2 per cent in April-July compared with growth of 3.1 per cent in same period of 2012. The decline in output of consumer durables stood at 9.3 per cent in July, from a growth of 0.8 per cent previously.

The segment saw a 12 per cent decline in output in April-July compared with growth of 6.1 per cent. Consumer non-durables output grew 6.8 per cent against a dip of 0.6 per cent a year ago and expanded 6.8 per cent in April-July compared with 0.6 per cent growth in the same period a year ago.

Intermediate goods output expanded 2.4 per cent in July as against 0.1 per cent a year ago. For April-July, the expansion was 1.8 per cent compared with 0.6 per cent. Basic goods output grew 1.7 per cent in July from a growth of 1 per cent last year.

Production of these goods grew by 0.2 per cent in April-July compared with 2.7 per cent a year earlier. Siddharth Shankar, advisor of research firm KASSA, said, "Good monsoon and a stable rupee will help stabilise inflation in the near term. Going forward, I expect IIP numbers to maintain a positive trend."