India's economy grew at its weakest pace in more than two years in the quarter that ended in September, revealing the heavy toll that stubbornly high inflation, rising interest rates and crisis-hit global capital markets are having on Asia's third-biggest economy.

Weakness in the second quarter was broad-based, with manufacturing growing at only 2.7 per cent and mining contracting 2.9 per cent, and reinforcing the view that the RBI will have to stop its tightening policy.

Gross domestic product growth fell to 6.9 per cent in the second quarter of the financial year, slipping below 8 per cent for the third straight quarter.

The GDP figure was in line with the median forecast in a Reuters poll for an annual rise of 6.9 per cent, and compares with 7.7 per cent growth in the previous quarter.

The $1.6 trillion economy, with a population of 1.2 billion, has been hit by a confluence of factors. Inflation has been persistently high all year, policy inertia has hurt spending and industrial output and, now, capital outflows have pushed the rupee to new lows.

Thirteen interest rate increases have failed to arrest inflation, which is close to double-digits.

While the Reserve Bank of India has indicated the low possibility of another rate increase, some market experts say they won't be surprised if there is another tightening in mid-December.

The Indian economy grew at 8.5 per cent in 2010/11.

"It's more or less in line with our expectations, and we're expecting it to stay around this level of 7 per cent for the remaining quarters of this financial year," said Indranil Sengupta, an economist at the Bank of America-Merrill Lynch in Mumbai.

The manufacturing sector, which contributes nearly 16 per cent of the country's GDP, grew at 2.7 per cent in the September quarter, data showed. This compares with 7.8 per cent a year ago, and 7.2 per cent in the previous quarter.

Farm output rose an annual 3.2 per cent for the same period, down from its previous quarter's 3.9 per cent growth .

Indian corporates, particularly in the auto and real estate sector, have been hit by rising input costs and slowdown in demand.

Growth has been slowing across Asia owing to the slump in demand from stalling developed economies for the region's exports. India's slowdown has been domestically led and sharp, estimates having fallen from expectations of a 9 per cent pace at the start of the year.

China's economy slowed down to 9.1 percent in the third quarter, from a 9.5 percent in the second quarter, while the Organisation for Economic Cooperation and Development Bank cut its forecasts for the global economy to 3.4 per cent for 2012.

The global economic recovery is running out of steam, leaving the euro zone stuck in a mild recession and the United States at risk of following suit, the OECD said on Monday, sharply cutting its forecasts.

India's benchmark 10-year federal bond yield eased briefly to 8.76 per cent after the data , while Sensex was trading down 0.4 per cent, trimming their fall from 0.7 before the data.

Indranil Sengupta, economist at Bank Of America-Merril Lynch, Mumbai, says, "It's more or less in line with our expectations, and we're expecting it to stay around this level of 7 per cent for the remaining quarters of this financial year."

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