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NEW DELHI (Reuters) - India's domestically-powered economy grew more than expected in the September quarter, defying weakness elsewhere and putting pressure on the central bank to tighten monetary policy although a rate increase next month still looks unlikely.
Annual gross domestic product grew 8.9 percent in the September quarter -- matching the revised figure for the previous quarter and above a Reuters' forecast of 8.3 percent.
"Governor Subbarao has strongly hinted that the RBI (Reserve Bank of India) will take a break from raising policy rates for the next one or two months, but the strong growth numbers today may change his mind," said Brian Jackson, strategist at Royal Bank of Canada in Hong Kong.
"Inflation is still the number one policy focus, and we continue to expect more rate hikes in the months ahead, perhaps as soon as the next meeting in December," he said.
The RBI's next policy review is on Dec. 16. Analysts polled by Reuters expect the central bank to raise rates by an additional 25 basis points by the end of March.
Prime Minister Manmohan Singh's government, facing parliamentary deadlock over a scandal in which telecom licences are alleged to have been granted too cheaply -- is under pressure to rein in inflation while keeping high economic growth on track.
Consumer price inflation eased to an annual 9.7 percent in October from 9.82 percent the previous month, data showed on Tuesday. Wholesale price inflation, which is more closely watched as it covers a higher number of products, eased to 8.58 percent in October from 8.62 percent a month earlier.
Strong growth in India contrasted with data on Tuesday from Japan and South Korea, where factories cut output in October adding to evidence of an Asia-wide slowdown and boding ill for the rest of the world that has relied on the region to keep the global economy humming.
China's economy grew at 9.6 percent in the September quarter, down from 10.3 percent in the previous quarter.
India's benchmark 10-year bond yield closed up 6 basis points on the day, despite further extension of liquidity easing measures by the central bank late on Monday, which disappointed markets that had instead been hoping for a cut in banks' reserve requirements.
Markets expect the RBI to hold rates steady during its policy statement in December, after Subbarao said early this month that the RBI was unlikely to raise rates for the next three months. However, the long end of the swap curve rose further than the short end on Tuesday, causing a bear steepening, reflecting market worries of a rate increase sooner rather than later -- or at least a more hawkish stance from the RBI.
The benchmark five-year swap ended up 6 basis points on the day at 7.30 percent, after touching 7.31 percent, its highest since Nov. 11, while the one-year rate ended down 4 points at 6.78 percent.
Investment growth slowed on an annualised basis to 11.1 percent from 19 percent in the previous quarter, while annualised private consumption accelerated to 9.3 percent from 7.8 percent in the previous quarter, pointing to inflationary risks.
The services sector, which accounts for over 50 percent of GDP, grew 9.8 percent in the September quarter, higher than 9.3 percent in the previous quarter.
Finance Minister Pranab Mukherjee predicted India's economy would grow at 8.5 to 8.75 percent in the fiscal year that ends in March 2011, up from earlier 8.5 percent government forecasts.
Signs of easing inflation, a fragile global economy and weaker industrial output in September were likely to forestall any rise in rates in the near-term, some analysts said. "Unless the full year growth looks likely to cross 9 percent, the central bank is unlikely to get aggressive again in raising rates," said Anjali Varma, economist at MF Global in Mumbai.
"I do not expect any more rate hikes in this fiscal year. We also have to look at how industrial production fares going ahead, as that has started slowing down only now."
Industrial output growth -- a key indicator of growth momentum -- in Asia's third-largest economy slowed unexpectedly in September to 4.4 percent from a year earlier, down from the previous month's upwardly revised 6.92 percent growth.
Editing by Alistair Scrutton and Tony Munroe