India’s economy grew last quarter at the slowest pace in more than two years after the nation’s central bank raised interest rates by a record to tame the fastest inflation among so-called BRIC nations.

Gross domestic product rose 6.9 percent in the three months through September, the Central Statistical Office said in a statement in New Delhi today. That’s the weakest expansion since the second quarter of 2009, and matches the median of 6.9 percent in a Bloomberg News survey of 24 economists.

Prime Minister Manmohan Singh’s efforts to stimulate growth are being hamstrung by corruption scandals that have stalled legislation for a year, and political outcry against foreign investment in retail. The Reserve Bank of India has also been constrained in supporting the economy as it struggles with inflation that’s almost twice the rate in China and higher than in Brazil and Russia.

“High interest rates, uncertainty about reforms, allegations of corruption and recessionary global conditions are casting a deep shadow over India’s growth story,” said Rohini Malkani, a Mumbai-based economist at Citigroup Inc. “What is worrying is that growth prospects do not seem sunny for the next year either.”

Citigroup this week cut its estimate for the Indian economy’s expansion to 7.1 percent for the year ending March 31 from 7.6 percent earlier.

Rupee Drops

The Indian rupee weakened 0.4 percent to 52.21 per U.S. dollar at the close in Mumbai, while the BSE India Sensitive Index (SENSEX) advanced 0.7 percent. The yield on the 8.79 percent note due November 2021 fell nine basis points, or 0.09 percentage point, to 8.74 percent.

The currency has slumped 14.4 percent against the dollar this year, making it Asia’s worst performer as risks to global growth posed by Europe’s debt crisis prompted investors to sell stocks. The Sensex has lost a fifth of its value in 2011.

India’s stock index, the third-worst performer among major Asian indexes this year, may be hurt the most among emerging- market equities from global risk aversion because of a slowing economy and a weak rupee, Tata Asset Management Ltd. said on Nov. 28.

BRICs Falter

While India’s growth is still the fastest after China among major economies, expansion in BRIC nations is starting to falter as demand from Europe wanes. China’s economy grew 9.1 percent in the third quarter from a year earlier, the least since 2009.

Manufacturing in India grew 2.7 percent in the three months through September from a year earlier, slower than the 7.2 percent gain in the previous quarter, today’s report showed. Mining fell 2.9 percent, farm output rose 3.2 percent and construction grew 4.3 percent.

Investment by companies and the government declined 0.6 percent in the three months ended Sept. 30 from a year earlier after a 7.9 percent gain in the previous three months, according to the report.

“The slippage in investment that we are seeing doesn’t jeopardize the medium-to-long term story at all,” Kaushik Basu, chief economic adviser in India’s finance ministry, told reporters in New Delhi today. He expects India’s economy to expand about 7.5 percent in the year ending March 31.

Reduced Scope

“Price pressures have reduced the RBI’s scope to ease rates anytime soon and prop up growth,” Shubhada Rao, Mumbai- based chief economist at Yes Bank Ltd., said before the report.

India’s benchmark wholesale-price inflation was 9.73 percent in October. By comparison, consumer prices rose 7 percent in Brazil, 5.5 percent in China and 7.2 percent in Russia in the same month.

The Reserve Bank signaled last month it’s nearing the end of monetary tightening, provided inflation slows. The central bank has boosted the repurchase rate by 375 basis points in 13 moves since the start of 2010, the fastest round of increases since the monetary authority was established in 1935, according to Bloomberg data.

Higher borrowing costs have damped car demand, Arvind Saxena, New Delhi-based director of marketing and sales at Hyundai Motor India Ltd., said in an e-mailed reply on Nov. 25. Sales may grow about 5 percent in 2011 from a year earlier, compared with a 23 percent gain in 2010, Saxena said.

Monetary Stimulus

Meanwhile, central banks across five continents are undertaking the broadest reduction in borrowing costs since 2009 to avert a global economic slump stemming from Europe’s debt turmoil. The U.S., the U.K. and nine other nations along with the European Central Bank have bolstered monetary stimulus.

In Asia, Thailand cut interest rates today, while Indonesia reduced its reference rate on Nov. 10. The Reserve Bank of Australia on Nov. 1 lowered its benchmark rate for the first time in 31 months, a quarter percentage point reduction from a developed-world high of 4.75 percent.

“Economic sentiment has now turned sharply negative,” Indranil Pan, chief economist at Kotak Mahindra Bank Ltd. in Mumbai, said before the report. “The current situation of domestic and global headwinds to growth provides the government with a good opportunity to carry out reforms.”

Singh, halfway through his second term, is under pressure to revive a legislative agenda derailed by corruption allegations in the award of telephone licenses and street protests against inflation. His government faces at least five regional elections next year, including one in Uttar Pradesh, India’s most populous state.

Retail Business

Still, the cabinet’s decision last week to open India’s retail business to overseas companies such as Wal-Mart Stores Inc. has stirred protests from the opposition as well as key allies, who say the move would close down local shops.

The cabinet’s directive, which doesn’t need parliamentary approval, would allow foreign companies to own as much as 51 percent of retailers selling more than one brand. It would also permit companies that sell a single brand such as Nike Inc. to own 100 percent of their operations, removing a cap previously set at 51 percent.

Debate in parliament was suspended for a seventh successive day today as lawmakers demanded the government reverse the policy. Parliament has now seen repeated disruptions over four sessions. Last year’s winter sitting was the least productive in 25 years.

“Reforms like easing FDI in retail is vital for the economy,” Dipankar Mitra, an economist at Motilal Oswal Securities Ltd. in Mumbai, said before the report. “Or else India’s growth momentum will face huge roadblocks.”

Bloomberg