India's annual industrial output growth probably cooled in September but was still robust on festival demand, and analysts said stimulus measures needed to continue next year to make the recovery durable.

The median forecast in a Reuters poll of 22 analysts on Tuesday was for industrial output to have risen 7.3% from a year earlier, lower than a provisional 10.4% rise in August data.

"Manufacturing growth should be reasonably strong in September. The trend will continue October onwards because economic activities had slowed last year after the global financial crisis," said Aditi Nayar, senior analyst at rating agency ICRA.

Robust retail sales leading up to the festival season in September, the second instalment of back-pay to government employees and lower duty rates have contributed to a revival in demand, she said.

Growth in industrial output slowed to 2.6% in 2008/09 (April/March) from 8.5 percent in the previous year as high interest rates and then the global slump hit manufacturers in Asia's third-largest economy.

But aggressive rate reductions by the central bank coupled with tax cuts and heavy doses of government spending helped revive output from the beginning of this year.

For a graphic on impact of stimulus on factory output, click http://graphics.thomsonreuters.com/119/IN_INDOUT1109.gif

Fragile Recovery

The worst dry spell in nearly four decades, followed by floods in some parts of the country, have hurt summer crops and scalped rural demand. This poses a risk to the economic recovery.

The October purchasing managers' index showed the pace of manufacturing activity expanded for the seventh straight month, although at a slightly slower pace.

Faster industrial growth and rising inflationary pressures have fuelled debate on how soon the central bank would unwind its accommodative monetary stance.

The Reserve Bank of India (RBI) left key rates unchanged at its October policy review but started withdrawing some of liquidity steps that were part of the stimulus.

Prime Minister Manmohan Singh said on Sunday that the government would unwind fiscal stimulus next year.

RBI Governor Duvvuri Subbarao had earlier said India needed to tighten policy, but warned of the risks of mistiming such a move.

Many private economists expect the central bank to increase reserve requirements for banks before beginning to lift policy rates early in 2010.

"Monetary tightening may happen before the end of March 2010," Nayar said, adding some of the fiscal stimulus need to continue next year.

The Reserve Bank has forecast that economic growth will slow down to 6% in 2009/10 from 6.7% a year earlier and 9% or more between 2005/06 and 2007/08.