India's industrial output expanded above forecasts in June helped by strong capital goods production, confirming resilience in Asia's third-largest economy and supporting the case for the Reserve Bank to persist with its battle against high inflation.

Within the surprisingly heady 8.8 per cent pace of growth in industry overall in June, the consumer-driven components were weak.

Yet there is enough momentum in the services sector, in jobs and exports to suggest India can sustain a reasonable momentum even while the rest of the world copes with the fallout of a debt crisis in Europe and faltering demand in the United States.

"Indian data has been resilient in recent weeks, which signals a fair amount of resilience in the economy despite tighter policy from the RBI (the central bank) in the past 18 months," said Jonathan Cavenagh, senior foreign exchange strategist at Westpac Institutional Bank in Singapore:

"In general Asian data is still holding up quite well."

The Reserve Bank of India raised key interest rates by a steeper-than-expected 50 basis points last month, the 11th increase since March 2010 that has dragged down factory output this year and may threaten the government's economic growth projections of around 8.5 per cent.

But some analysts cautioned that the surprise output jump in June may be a blip and that consumer goods growth - a sign of consumer demand - was weak. Others said the data may signal the $1.6 trillion economy still has some steam.

The federal statistics office in New Delhi said on Friday that industrial output in June rose 8.8 per cent from a year earlier after gaining 5.9 per cent in May and beating economists' expectations of a 5.5. per cent rise.

Private economists have been revising down their forecasts for growth in the current fiscal year, with many expecting the economy to grow less than 8 per cent after it expanded 8.5 per cent in the year that ended in March.

Tightening Cycle Not Over

At the same time, most economists do not expect or recommend the Reserve Bank of India -- easily the most aggressive in Asia in its inflation fight -- should lower its guard, the financial market turmoil of the past few weeks notwithstanding.

Others such as South Korea and Indonesia have held rates steady at reviews this month, but they appear to have less of a fight against price pressures on their hands. Inflation quickened to 9.44 per cent in June, staying well above policy rates.

Indeed, the Reserve Bank of India made clear on Friday inflation fighting was a priority and it could not possibly risk inflationary pressures getting out of control.

Reflecting those expectations, Indian overnight indexed swap (OIS) rates rose on Friday after the data. The one-year OIS rate rose 4 basis points to 7.67 per cent, while the benchmark five-year rate rose 3 basis points to 6.87 per cent after the data, traders said.

The data released on Friday showed that capital goods jumped 38 per cent, but consumer goods production rose only 1.6 per cent.

"Most of this rebound is because of capital goods. Except capital goods there has actually been a slowdown so sustainability of this trend is actually in question," said Sonal Verma, an economist at Nomura in Mumbai.

"Given the headline inflation at above 9 per cent we continue to expect one final 25 basis point rate hike in September."

The services sector still contributes about 60 per cent of India's gross domestic product and is now the main engine of growth with the manufacturing sector showing some signs of faltering this year due to both high rates and creaky infrastructure.

Some economists cautioned that the capital goods jump may just be temporary.

"There seems to be some lumpy bunched up orders in some categories like insulated cables and printing and textile machinery. This is not the kind of growth that can be sustained," said Samiran Chakraborty, head of research at Standard Chartered Bank in Mumbai.

The annual April to June industrial growth was 6.8 per cent.

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