India economy surges, inflation not a major concern

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The economy grew at its fastest rate in 18 months in the quarter through September, smashing expectations and adding pressure to bring forward an interest 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.

The expansion was driven by government spending, manufacturing, services, and a 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."

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

In the June quarter, the economy grew 6.1 percent from a year earlier, and Prior-Wandesforde said that by his calculation the last quarter's growth was the sharpest on a quarter-by-quarter basis since quarterly data began in 1996.

Manufacturing output grew 9.2 percent in the quarter as consumers bought more cars and other goods.

China, which along with India is helping to pull the global economy out of its worst recession in decades, clocked growth of 8.9 percent during the same quarter.

The yield on the 10-year bond rose 3 basis points, swap rates moved up by 5 to 7 basis points and the rupee rose. The Sensex share index extended gains to more than 2 percent, though still lagged the nearly 3 percent gain in the MSCI Index of Asia ex-Japan shares.