India’s economy expanded at its weakest pace in five quarters, slowing to 7.8 per cent in the three months to March, data showed yesterday, as aggressive interest rate hikes hit output and investment.

Growth for the final quarter of the fiscal year 2010-11 was down nearly a percentage point from 8.6 per cent growth in the same period last year and was also below the 8.3 per cent expansion posted in the third quarter.

The sharp deceleration indicated Asia’s third-largest economy was feeling the pinch from nine interest rate hikes in 15 months aimed at curbing stubbornly high inflation that has caused huge hardship to India’s poor masses.

“We believe the omens for Indian growth are not particularly good,” said Credit Suisse economist Robert Prior-Wandesforde.

The “lagged effect of the sizeable tightening of monetary policy together with the 20 per cent rise in crude oil prices this calendar year is likely to take a sizable toll on economic activity,” he said.

The quarterly growth, well below rival emerging market giant China’s 9.7 per cent expansion, surprised markets which expected an 8.2 per cent rise.

Manufacturing growth slowed to 5.5 per cent from 15.2 per cent in the same period the previous year. Mining and utilities output was also down.

Investment growth decelerated to 0.37 per cent in the quarter from 7.8 per cent in the previous three months as borrowing costs climbed.

Business reacted with dismay to the figures.

The industrial slowdown “is a worrying trend,” said Rajiv Kumar, secretary general of the Federation of Indian Chambers of Commerce and Industry.

The service sector, which accounts for more than half of India’s gross domestic product, grew by an annual 8.7 per cent in the quarter, the weakest rate since the last three months of 2004, economists said.

The slowdown was seen as unlikely to put an end to rate hikes, although economists said the central bank might moderate its tightening pace.