India's annual industrial output growth dropped to single-digits in August, raising doubts about the economy's strength and the need for the central bank to increase rates again in November.

The drop mainly reflected a fall in capital goods output -- payback for a stunning 72 percent rise in July -- and marked the slowest industrial output growth since May 2009, data on Tuesday showed.   

A fall in a purchasing managers' index for September suggested further weakness, although analysts cautioned industrial output had been volatile, putting added weight on Friday's inflation data to determine the policy outlook.  

"It reduces the odds for the Nov 2 rate hike," Dariusz Kowalczyk, senior economist and strategist at Credit Agricole CIB in Hong Kong, said of the output data.

"I still think they will hike, but there will be speculation in the market that they would not, given that data has recently been extraordinarily choppy and therefore it has increased uncertainty regarding economic performance," he said.

Industrial output, combining factory, mine and utility production, rose 5.6 percent in August from a year earlier, well below the forecast in a Reuters poll of 9.65 percent.

It marked a big drop from July's annual rise of 15.2 percent, which was revised up in the latest data from a preliminary 13.8 percent reported last month.   

India's 10-year benchmark bond yields fell 2 basis points immediately after the data before retracing the ground as traders eyed inflation data on Friday.   

The one-year swap eased to 6.61 percent after the data, off the day's high of 6.65 percent    

The Reserve Bank of India (RBI) has boosted its policy rate five times this year by a total of 125 basis points, raising expectations it may be close to a pause especially since inflation appears to have peaked.

Still, inflation is above the central bank's comfort zone of 5-6 percent and economic growth is expected this fiscal year at a healthy clip of 8.5 percent. So analysts see the central bank raising rates by at least a quarter percentage point by the end of the calendar year and possible by another quarter point in the first quarter of 2011. - Reuters