Oct. 12 (Bloomberg) -- India's industrial production growth exceeded expectations in August, accelerating for the first time in five months, as record investment in factories, roads and power plants boosted demand for cement and steel.

Production at factories, utilities and mines jumped 10.7 percent from a year earlier after gaining a revised 7.5 percent in July, the statistics bureau said in New Delhi today. That beat all but one of the 18 forecasts in a Bloomberg News survey of economists, where the median estimate was an 8.6 percent gain.

Prime Minister Manmohan Singh's government is expanding infrastructure while Toyota Motor Corp. and other companies build new factories. That may ease supply bottlenecks and help contain inflation, allowing the Reserve Bank of India to keep borrowing costs unchanged at its Oct. 30 monetary policy meeting.

``The capital expenditure cycle is unlikely to get dented,'' said Rajeev Malik, senior economist at JPMorgan Chase & Co. in Singapore. ``The central bank will keep its key interest rates unchanged, though an increase in the cash reserve ratio can't be ruled out because excess liquidity is enormous.''

Inflation in the last week of September slowed more than analysts' forecast to 3.26 percent, close to a two-year low, the government said in a separate report today.

The yield on the 10-year government bond rose 1 basis point, or 0.01 percentage point, to 7.90 percent at the 5:30 p.m. close in Mumbai, while the rupee rose 0.2 percent to 39.365 against the dollar. The benchmark Sensitive index, which has risen by a third this year, fell 2 percent.

Construction, Mining

Manufacturing output rose 10.4 percent in August from a year earlier, more than July's 7.9 percent gain, according to today's report. Production of machinery and other capital goods gained 30 percent in September, indicating growing investment in factories and other construction activity. Mining production increased 17.1 percent and electricity gained 9.2 percent.

Rising industrial production has helped India's economy expand at a record 8.6 percent average pace since 2003, the second-fastest after China among major economies. China's industrial output rose 17.5 percent in August.

Steel Authority of India Ltd., the nation's biggest state- owned steelmaker, said last week it raised production 10 percent in the second quarter because demand increased from carmakers and construction companies. Cement output rose 16.2 percent in August, the fastest pace in about a year.

Singh's government is increasing infrastructure spending by 40 percent to 1.34 trillion rupees ($34 billion) this year in a bid to attract more overseas manufacturing companies.

New Factories

India's growth is attracting Honda, Volkswagen AG and other companies to build factories in the South Asian nation to profit from consumer demand stoked by rising salaries and borrowings from banks. Hewitt Associates Inc. forecasts salaries in India will climb an average 14.5 percent in 2007, the biggest gain in Asia for the second straight year.

India expects foreign direct investments to double to $30 billion in the year ending March 31 from a year earlier.

Banks are also flush with cash as overseas funds bought a net 17.48 billion rupees ($433.3 million) of Indian shares on Oct. 10., boosting their total equity purchases this year to a record $16.3 billion, according to the stock market regulator.

The Reserve Bank of India has been relying on the cash reserve ratio, or the proportion of deposits that lenders need to place with it as reserves, to reduce excess funds with commercial banks, curb bank lending and check consumer demand. It has raised it four times since December, which has helped slow loans growth and drive inflation down.

Overnight Rate

The central bank has raised its key overnight lending rate only two times since December to 7.75 percent, a 5 1/2-year high level. It last increased the rate in March.

Michael Kurtz, an equity strategist at Bear Stearns Ltd. in Hong Kong, expects the central bank to continue to resort to ``liquidity mopping'' to prevent interest rates from declining and stoking inflation. State Bank of India, the country's largest commercial bank, and other lenders this week cut some rates on mortgages and other loans.

``What the Indian central bank now has to contend really with is the domestic liquidity impact of massive short-term capital inflows,'' Kurtz said. ``That's leading to a pick up in money supply. It will keep the central bank biased toward an anti-inflationary watch.''

Foreign share-buying has pushed stocks up 36 percent this year to close to an all-time high, causing the rupee to jump 12.8 percent, the fastest gain in at least 33 years.

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

Last Updated: October 12, 2007 09:03 EDT