The central bank, battling annual inflation that is above 8 per cent and rising, has reined in cash in the banking system to curb inflation rather than raising rates in the past year in an effort not to slow economic growth too aggressively.

But analysts said Thursday’s data suggested it had room to act again if inflation headed to double digits. “This is all the more the reason for RBI to keep watching and clamp down on liquidity,” Manju Ghodke, economist at construction and engineering firm Larsen & Toubro in Mumbai. “I see this as another signal that the economy is continuing to do well. RBI will then willingly sacrifice growth to curb inflation.”

Former IMF chief economist Raghuram Rajan said the RBI’s recent tightening measures were steps in the right direction. “On most counts real interest rates in India are negative, which means that monetary policy is still accommodative and it has to be tightened much more,” he said.

Monetary policy and a strong rupee last year clipped demand, and industrial output growth has fallen from double-digit rates early in 2007. But the rupee has declined 8 per cent against the dollar since the start of 2008 and Thursday’s data showed manufacturing production rose an annual 7.5 per cent in April, compared with an upwardly revised 3.9 per cent in March.