India economy surges, adds pressure to raise rates

By Manoj Kumar and Rajesh Kumar Singh

NEW DELHI (Reuters) - India's economy grew at its fastest rate in 18 months in the quarter through September, smashing expectations and adding pressure to bring forward a rate rise and cut stimulus spending as inflation mounts.

Asia's third-largest economy grew 7.9 percent in the past quarter from a year earlier, far above forecasts of 6.3 percent, but growth was expected to slow this quarter when the impact of a weak monsoon would be seen on crops, giving the government room to keep pro-growth policies in place for the near term.

India's expansion was driven by government spending, manufacturing, services, and better-than-forecast farming output, sending bond yields and swap rates higher as investors bet on a rise in rates and the finance minister said growth could hit 7 percent in the fiscal year ending in March 2010.

"This data could be a green light for the Reserve Bank of India to hike rates, and there are greater chances of this by end of the calendar year," said Robert Prior-Wandesforde, senior Asia economist at HSBC in Singapore.

"The exit from the fiscal stimulus by the government may also be earlier post the GDP data," he said.

Prior to the data, most economists had predicted a rate rise sometime between January and April 2010.

A top government official played down inflation concerns.

"I don't believe there are serious worries on inflation except food prices. Food prices are a matter of concern, but I don't think conventional monetary policy will take care of that problem," said Montek Singh Ahluwalia, deputy chairman of India's powerful Planning Commission.