New Delhi: India’s industrial output grew at a much faster-than-expected pace in March, allaying fears of a slowdown in the economy that will allow the Reserve bank of India (RBI) to continue with rate hikes to control stubbornly high inflation.

Production at factories, mines and utilities grew 7.3% on year in March, higher than an upwardly revised 3.65% growth a month ago and well above the median forecast for a 3.8% annual rise in a Reuters’ poll.

Also See Industrial Output Surges (PDF)

Capital goods output rose an annual 12.9% during the month compared with a contraction of 18% last month.

“IIP (industrial output) numbers are very healthy and encouraging and prove the underlying strength of the growth momentum. This will improve the RBI’s (Reserve Bank of India’s) focus on inflation control," said Rupa Rege Nitsure, chief economist at Bank of Baroda in Mumbai.

Most economists expect the central bank to raise its main operating policy rate by 25 basis point at its policy review in June, after it raised its key rates by a bigger-than-expected 50 basis points last week to tame stubbornly high inflation.

Manufacturing , which contributes about 80% to the overall output, grew 7.9% in March, sharply higher than 3.6% annual growth a month ago.

The most-traded 7.80% 2021 bond yield rose 2 basis points to 8.27% after the data. The main share index turned briefly positive to 0.1% from negative 0.4% before the data.

The 5-year and 1-year overnight indexed swap rates rose 2 basis points each to 8.33% and 8.11%, respectively, after the data.

India’s domestically driven economy, is expected to have grown 8.6% in the fiscal year that ended on 31 March, and the central bank has forecast growth to moderate to about 8% in the current fiscal year.

Finance minister Pranab Mukherjee warned on Wednesday volatile global commodity prices could prevent India from achieving a growth target of 9%, plus or minus 0.25%, for this fiscal year.

Oil prices rose to 32-month peaks in April due to tensions in the Middle East and North Africa, but a combination of a stronger dollar and signs of cooling in China has brought down prices.

While higher oil prices are threatening to slowdown the economy, they are posing inflationary risks.

Headline inflation surged to nearly 9% in March, well above forecasts. The RBI expects the headline inflation to remain around 9% in the April-September period.

Pranab Mukherjee has said inflation was likely to remain at elevated levels between 7-7.5% this fiscal year, at least a percentage point higher than the central bank’s end-March 2012 projection of 6%.

RBI governor Duvvuri Subbarao on Monday reiterated India will maintain its anti-inflationary stance even if that means sacrificing growth in the short term.

Analysts say rising input costs driven by commodity, and energy prices could erode the margins of manufacturing firms in India, as the investments have already slowed down in the sector.