Nov. 28 (Bloomberg) -- India’s economy grew at the slowest pace since 2004 last quarter, increasing pressure on the central bank to cut interest rates.

Asia’s third-largest economy expanded 7.6 percent in the three months to Sept. 30 from a year earlier, after a 7.9 percent gain in the previous quarter, the statistics office said in a statement in New Delhi today. The median forecast of 16 economists in a Bloomberg News survey was for 7.2 percent growth.

Governor Duvvuri Subbarao may have to deepen the rate cuts he started last month to support growth in India’s $1.2 trillion economy as the world sinks into recession. Reducing borrowing costs would also shore up investor confidence after terrorist attacks since Nov. 26 killed at least 121 people in Mumbai, the nation’s financial hub.

“Maintaining a soft interest-rates bias will help investor confidence,” said Mridul Saggar, chief economist at Kotak Securities Ltd. in Mumbai. “We see interest rates declining until the middle of next year.”

Commandos stormed a Jewish center in Mumbai today in a bid to free hostages as security forces scoured two luxury hotels for militants, more than 36 hours after the terror attacks in the city.

China this week cut interest rates by the most in 11 years and the Federal Reserve unveiled an $800 billion plan to combat the global recession.

‘Global Linkages’

“The global crisis is serious and India isn’t immune from it,” said Gaurav Kapur, senior economist at ABN Amro Bank in Mumbai. “India’s global linkages have increased and the economy certainly needs more monetary policy and fiscal stimulus.”

India’s exports fell for the first time in seven years in October, according to Trade Secretary Gopal K. Pillai, as the U.S., Europe and Japan fell into a recession in the third quarter. Textile exporters may cut about 500,000 jobs by April, according to India’s textile ministry.

“It’s possible some sectors may be more deeply affected and may resort to layoffs or salary cuts,” India’s Finance Minister Palaniappan Chidambaram said Nov. 24. “The macroeconomic impact of the global financial turmoil has been muted due to the overall strength of domestic demand and the predominantly domestic nature of financing of investment.”

Chidambaram expects India’s economic growth, which has averaged close to 9 percent since 2004, to slow to between 7 percent and 8 percent in the year to March 31. That would still be the fastest after China among the world’s major economies.

Manufacturing increased 5 percent in the three months to Sept. 30 from a year earlier, according to today’s release. Agriculture expanded 2.7 percent and financial services rose 9.2 percent.

To contact the reporter on this story: Cherian Thomas in New Delhi at cthomas1@bloomberg.net

Last Updated: November 28, 2008 00:35 EST