India’s economy grew at a far stronger rate than predicted in the second quarter of the fiscal year as poor farmers weathered a late monsoon, civil servants enjoyed a pay hike and the service sector boomed.

Policy makers had argued that strong domestic demand and conservative banking practices would insulate India from an ailing Western economy.

In the three months from July to September those hopes appeared to be vindicated as figures showed output grew by 7.9 per cent, compared with the same period a year earlier — much greater than the 6.3 per cent forecast by analysts.

The data helped lift stocks and government bond yields higher amid hopes that Asia's third-largest economy had turned a decisive corner. "As upside surprises go, this was a big one," said the HSBC economist Robert Prior-Wandesforde.

The GDP figures were the strongest since the first quarter of 2008, when the Indian economy grew by 8.6 per cent, and heightened expectations that the central bank will lift interest rates, possibly as early as January.

The Finance Minister Pranab Mukherjee said he now hoped that economic growth will come in at about 7 per cent for the full year. The Government had previously forecast growth of 6.25 per cent.

Analysts said that a key reason for the upside GDP surprise was that agriculture output increased by 0.9 per cent, compared with the same period a year earlier.

In the wake of a drought caused by a late monsoon this summer across much of the country, analysts had expected a decline of about 6 per cent.

The industrial sector grew by 8.3 per cent and the services sector by 9.3 per cent.

The output of community, social and personal services, which accounts for about 14 per cent of India’s GDP, jumped 12.7 per cent, on the back of pay increases to the country’s army of civil servants.

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