Economy grows as expected; Mukherjee ups FY11 hopes

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The economy grew at its fastest pace in six months in the quarter through March 2010, fuelled mainly by government and consumer spending, which is expected to allow policymakers to focus on anchoring inflation that is hovering near 10%.

The 8.6% expansion in the fourth quarter of the fiscal year 2009/10 was broadly in line with a median forecast of 8.7% in a Reuters poll and lifted the annual average growth rate for the full fiscal year to a slightly better-than-expected 7.4%.

The economy had grown 6.7% in 2008-09, and the Jan-March 2009-10 growth rate matches the revised data for the second quarter of 2009-10.

The data is unlikely to evoke any immediate and aggressive policy response from the central bank, as concerns on Europe's debt crisis are expected to keep its policy on hold for now.

"It would be important to note that this release is a backward looking number and our sense is that policy makers would remain considerate of the external developments and any associated downside risk to overall growth," said Anubhuti Sahay, an economist with Standard Chartered Bank in Mumbai.

The stocks and the rupee strengthened immediately after the data, while the benchmark bond yield rose 2 basis points from before the release.

The expansion in the March quarter was driven by government spending, manufacturing and services. Revival of growth in farm output after a contraction in the quarter ago underscored the broad-based recovery in Asia's third-largest economy.

Manufacturing output grew 16.3% on year in the quarter as consumers bought more cars and other goods, while farm output grew an annual 0.7% helped by a good winter harvest.