Indian industrial output in January grew at its fastest pace in 7 months, powered by a surge in manufacturing including consumer non-durables, a sign of strength in a sluggish economy that reinforces expectations the central bank will wait until April before cutting interest rates.

Production at India's factories, mines and utilities grew 6.8 percent from a year earlier, the notoriously volatile data showed, the highest since June 2011. 

Economists on average had expected growth of 2.1 percent, a Reuters poll showed. The January figure compares with a revised annual rise of 2.5 percent in December.

"The central bank is certainly going to wait for the budget and the government's borrowing programme for the next year and what is going to be the (fiscal) deficit number. That is why we believe the rate decision will happen in April," said Ashok Gautam, global head of markets at Axis Bank in Mumbai.

The benchmark 10-year 8.79 percent, 2021 bond  yield rose 2 basis points to 8.28 percent after the data release, while the five-year swap rate and one year swap rates were up 4 basis points each.  

Monday's industrial data kicks off a heavy week on the Indian economic calendar. The Reserve Bank of India holds a monetary policy review on Thursday. On Friday night, it surprised markets with a 75 basis point cut in the cash reserve ratio for banks.

Many in the market expect it to wait until after the federal budget, to be delivered on Friday, before it starts cutting interest rates after raising them 13 times through October. The RBI has another policy review set for April 17.      On Wednesday, the government will release monthly headline inflation figures.       

Production of consumer non-durable goods, including beverages and food product, jumped an annual 42.1 percent, up from 14 percent a month earlier.

Capital goods production, a proxy for investment, shrank for the fifth straight month, contracting 1.5 percent from a year earlier.

"Industrial activity has surprised largely on account of consumer non-durable goods, which suggests that recovery is not broadbased. Subdued capital goods output continues to increase the call for expediting measures to boost investment activity," said Upasna Bhardwaj, economist at ING Vysya in Mumbai.

Manufacturing output, which constitutes about 76 percent to industrial output, grew 8.5 percent in January.      Mining production shrank 2.7 percent from a year earlier, its sixth straight contraction, reflecting the regulatory and environmental approval issues plaguing the sector.

Electricity generation rose 3.2 percent from a year earlier, slower than the 9.1 percent rise in the previous month.      India's economic growth slowed to 6.1 percent, its weakest annual pace in almost three years in the three months to December, as high interest rates and rising input costs constrained investment and manufacturing. - Reuters