UPDATE 2-Indian factory output weakens, tightening pause seen

(Adds quotes, market reaction)

By Surojit Gupta

NEW DELHI, May 12 (Reuters) - India's industrial output grew at its weakest rate in six years in March, knocking the rupee to a one-year low and fanning speculation the central bank may hold off with more tightening in its battle with soaring inflation.

Industrial production <INIP=ECI> grew 3.0 percent in March from a year earlier, official data showed on Monday, well below February's 8.6 percent rise and a market forecast of 6.2 percent.

It was the smallest annual increase since a 2.4 percent rise in Feb. 2002, and analysts said the slowdown may forestall further policy tightening.

Output growth has fallen from double-digit levels last year as tighter monetary policy and a strong rupee clipped demand.

"You may not see particular easing of monetary policy, but Reserve Bank and other policy makers will be wary of tightening," Axis Bank economist Saugata Bhattacharya said.

The March data made some analysts predict growth in Asia's third-largest economy will slow to around 7.5 percent in the fiscal year ending in March 2009, well below the central bank's estimate of 8.0-8.5 percent.

"On a monthly basis output seems to have contracted, and we are seeing a definite slowdown in the economy," said A. Prasanna, economist at ICICI Securities in Mumbai.