A sharp slowdown in global demand and subdued domestic investment activity has impacted industrial production, Finance Minister Pranab Mukherjee said on Friday.

"The IIP figures are disappointing... Continued weak global business sentiments are also adversely impacting recovery in domestic private investment," Mukherjee said.

Factory output, as measured by the Index of Industrial Production (IIP), contracted in March to a five-year low of 3.5%. The IIP growth was higher at 9.4% in March 2011.

The IIP grew by a mere 2.8% in FY12, as against a healthy expansion of 8.2% in FY11. 

"Domestic investment recovery remains frail...Though the RBI's monetary stance has been reversed in last policy announcement, it will take some more time for interest costs to come down," Mukherjee said.

The revival of manufacturing output in the January-March quarter was not on expected lines, Mukherjee said, adding that part of the drop in March IIP numbers can be attributed to a high base of last year.

Expressing deep concern over the IIP numbers, Union Commerce & Industry Minister Anand Sharma said today that he would be meeting the exporters this month to analyse the impact of slowdown in global demand. 

Meanwhile, the Director-General of the Confederation of Indian Industry (CII), Chandrajit Banerjee, said that the March IIP data was extremely disappointing. 

Besides easing the monetary policy, it is important that some of the key reforms, which are politically relatively easy to get through, are announced at the earliest, Banerjee said. The importance of improving sentiment at this stage cannot be over-emphasised, he added.

The Reserve Bank of India (RBI) remains focused on fighting inflation, but other pressures cannot be ignored in the present situation, deputy governor Subir Gokarn said today. A sharp contraction in industrial output in March reinforces the slowdown trend in the country, he said at an event organised by the CII Southern Council.

Inflation has moderated as a result of the sharp slowdown in economic activity, Gokarn said. 

The deputy governor of the RBI also said that the RBI will continue to use instruments within its ambit to curb volatility in the foreign exchange market.

Though stress in the euro area has eased, risks remain, the RBI Deputy Governor said, adding that global conditions are likely to be challenging for some time to come.

Domestic growth-inflation balance is stabilising, but risks remain on both the fronts. Financial and external pressures are strongly influencing the policy environment, Gokarn said. "Outlook for FY13 is that we are expecting a mild recovery in growth. We are expecting a 7.5% GDP growth," he said.