India’s industrial output rose 7 per cent in April from a year earlier, rebounding from the previous month with a resilience that economists said gave the central bank room to tighten policy further. Industrial production outstripped a forecast for annual growth of 5.7 per cent in a Reuters poll, and jumped from an upwardly revised 3.9 per cent in March. The data comes a day after the Reserve Bank of India (RBI) unexpectedly raised its key lending rate for the first time in more than a year, taking it up 25 basis points to a five-and-a-half year high of 8 per cent to contain inflation expectations.

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.

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