Dec. 7 (Bloomberg) -- India's Finance Minister Palaniappan Chidambaram said economic growth in the first six months of the financial year has been ``buoyant'' amid the challenge posed by capital inflows.

``There are short-term challenges of managing inflows without endangering growth and price stability,'' the government said in a mid-year review of the economy presented in parliament by Chidambaram today. ``The buoyant growth in the first half of the current year reaffirms continuation of this momentum.''

The second-fastest pace of economic growth among the major economies has lured overseas investors to buy as much as $18 billion of stocks and bonds this year. That has driven the rupee to strengthen more than 12 percent against the dollar, eroding the value of exports, and has stoked inflation.

``The unprecedented surge in foreign investments has led to an increase in the availability of liquidity in the economy causing a rise in inflation pressure,'' said D.H. Pai Panandiker, president of the RPG Foundation, an economic policy group based in New Delhi. ``The Reserve Bank of India has a difficult task at hand to manage the inflows and at the same ensure growth.''

In the six months ended Sept. 30, the economy expanded at 9.1 percent compared with 9.9 percent a year earlier. India's fiscal year starts April 1.

Three years of rising borrowing costs in the world's fastest-growing major economy after China have reduced demand for Tata Motors Ltd.'s buses and Bajaj Auto Ltd.'s motorcycles. The Reserve Bank of India has also increased the ratio of deposits that commercial lenders must set aside four times this year.

Farm Output

The government said it wants farming to pick up to reduce unemployment in the country of 1.1 billion people, of whom half live on less than $2 a day, according to the World Bank.

``While impetus to growth will continue to be provided by industry and services, which will become increasingly competitive, growth in agriculture and absorption of labor in productive areas will need focused attention,'' the report said.

The government's measures on supply and demand have helped curb inflation to near a five-year low after it had accelerated to a two-year high earlier this year.

India's inflation unexpectedly eased in the third week of November as increased farm production boosted by monsoon rains helped contain food prices. Wholesale prices rose 3.01 percent in the week ended Nov. 24 from a year earlier, slower than the previous week's 3.21 percent gain, the government said today.

Capital Flows

The government, which said capital inflows have caused the rupee to strengthen, wants exporters to be more competitive and productive to cope with the effects of the rising rupee. A higher rupee makes Indian goods more costly overseas and erodes the revenue of the South Asian nation's exporters.

India's rupee, up 12.4 percent this year against the dollar, is headed for the biggest annual gain at least since 1974, data compiled by Bloomberg show. It is the second-best performer among the most-actively traded currencies in Asia excluding Japan.

Overseas funds more than doubled their net stock purchases to a record $16.5 billion so far this year as the benchmark share index rallied 44 percent to climb above the 20,000-mark for only the seventh time in its history.

The government, which reiterated that it wants growth to become more inclusive, said the subsidy bill was having a negative impact on finances. Reform proposals are aimed at making subsidies work for the poor, the report said.

India's central bank expects growth in the year to March 2008 to ease to 8.5 percent after it raised interest rates nine times since 2004. The reverse repurchase rate is now at a five- year high of 6 percent.

To contact the reporters on this story: Kartik Goyal in New Delhi at kgoyal@bloomberg.net; Bibhudatta Pradhan in New Delhi at bpradhan@bloomberg.net.

Last Updated: December 7, 2007 04:52 EST