India's economy grew at its weakest pace in more than two years in the quarter that ended in September, revealing the heavy toll that stubbornly high inflation, rising interest rates and crisis-hit global capital markets are having on Asia's third-biggest economy.

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A laborer busy with construction work

Weakness in the second quarter was broad-based, with manufacturing growing at only 2.7 percent and mining contracting 2.9 percent, and reinforcing the view that the RBI will have to stop its tightening policy.

Gross domestic product growth fell to 6.9 percent in the second quarter of the financial year, slipping below 8 percent for the third straight quarter. The GDP figure was in line with the median forecast in a Reuters poll for an annual rise of 6.9 percent, and compares with 7.7 percent growth in the previous quarter.

The $1.6 trillion economy, with a population of 1.2 billion, has been hit by a confluence of factors. Inflation has been persistently high all year, policy inertia has hurt spending and industrial output and, now, capital outflows have pushed the rupee to new lows.

Thirteen interest rate increases have failed to arrest inflation, which is close to double-digits. While the Reserve Bank of India has indicated the low possibility of another rate increase, some market experts say they won't be surprised if there is another tightening in mid-December.

The Indian economy grew at 8.5 percent in 2010/11. It's more or less in line with our expectations, and we're expecting it to stay around this level of 7 percent for the remaining quarters of this financial year, said Indranil Sengupta, an economist at the Bank of America-Merrill Lynch in Mumbai.

The manufacturing sector, which contributes nearly 16 percent of the country's GDP, grew at 2.7 percent in the September quarter, data showed. This compares with 7.8 percent a year ago, and 7.2 percent in the previous quarter.

Farm output rose an annual 3.2 percent for the same period, down from its previous quarter's 3.9 percent growth. Indian corporates, particularly in the auto and real estate sector, have been hit by rising input costs and slowdown in demand.

Growth has been slowing across Asia owing to the slump in demand from stalling developed economies for the region's exports. India's slowdown has been domestically led and sharp, estimates having fallen from expectations of a 9 percent pace at the start of the year.

China's economy slowed down to 9.1 percent in the third quarter, from a 9.5 percent in the second quarter, while the Organisation for Economic Cooperation and Development Bank cut its forecasts for the global economy to 3.4 percent for 2012.

The global economic recovery is running out of steam, leaving the eurozone stuck in a mild recession and the United States at risk of following suit, the OECD said on Monday, sharply cutting its forecasts.

India's benchmark 10-year federal bond yield eased briefly to 8.76 percent after the data, while Sensex was trading down 0.4 percent, trimming their fall from 0.7 before the data.