India's economy grew 8.8% in June quarter: Govt

India's economy grew at its fastest clip in nearly three years in the quarter through June on strong manufacturing growth and farm output that may keep the Reserve Bank of India (RBI) on its policy tightening path.

The 8.8% expansion compares with a median forecast of an annual rise of 8.7% in a Reuters' poll and an 8.6% expansion in the previous quarter.

The data underscores continued growth momentum in Asia's third-largest economy amid growing uncertainty over global recovery. The strong growth may allow the RBI to focus more on containing near double-digit inflation.

The RBI has raised interest rates four times since mid-March to stamp down inflationary pressures and has said it may have to give precedence to containing inflation over other policy objectives.

India's central bank is widely expected to raise policy rates by another 50 basis points by end-2010, and some bond dealers expect a 25-basis points hike in key rates as early as in its September 16 policy review.

India's 10-year benchmark bond yield fell 2 basis points to 7.95% after the data. It had closed at 7.99% in the previous session.

India's domestic-demand driven economy is benefiting from a buoyant consumer demand that is pushing up car sales and making factories produce to their optimum capacity.

Annual car sales in India rose 38% in July.

India's June quarter manufacturing output jumped 12.4% on year compared with an annual rise of 3.4% in the year ago period.

Its farm sector expanded 2.8% and is expected to see robust growth on good monsoon rains, which is likely to further boost consumer demand by lifting rural income.

The economy is expected to grow 8.5% in the current fiscal year to end-March 2011, after expanding an annual 7.4% in the previous year.

But, a strong economic growth has also raised the spectre of capacity constraints, which analysts hold partly responsible for a persistently high headline inflation, which stood at 9.97% last month.

Although India's wholesale price index in July rose at its slowest pace in six months, underlying price pressures remain.

The ruling Congress party has said that controlling prices must top the government's agenda in the face of popular discontent with price rises affecting hundreds of millions of people who live on under $1.25 a day.

RBI governor Duvvuri Subbarao last week said inflationary pressures were easing, but analysts say this is unlikely to deter him from raising rates again to slow down headline inflation to 6% by March 2011.