New Delhi, Nov 11 (IANS): India's industrial output fell sharply in September at 1.9 percent, official data showed Friday, growing the slowest in over two years as rising interest rates and a slump in investments started to bite.

Industrial production has been sluggish in the quarter ending September, with India Inc blaming rising interest rates, which shot up after successive rate hikes by the Reserve Bank of India (RBI) and a slowdown in overall investment activity because of uncertainty in the global economy.

Growth in factory output, measured in terms of the Index of Industrial Production (IIP), showed only a 3.8 percent increase in July, and nudged up further to 4.1 percent in August.

Analysts, said the decline in output was expected.

"The September numbers confirm a general contraction in Indian economy. Manufacturing and mining have now been decelerating for a few months. With coal output contracting by 17 percent, fears are that electricity which has so far been stable will also suffer in the next cycle," said Anis Chakravarty, Director, Deloitte Haskins and Sells.

"Given high input prices, further deceleration may be expected. Overall the outlook remains negative as it is unlikely that the situation will improve prior to Q4 of the current fiscal," added Chakravarty.

For the half year in the current fiscal IIP has increased by 5 percent, compared to 8.2 percent in the April-September period of 2010-11, according to data released by the ministry of statistics and programme implementation.

In September, mining output fell by 5.6 percent, while the sector's cumulative production fell by 1 percent in the first six months of 2011-12.

The manufacturing sector, which has the highest weightage in the IIP, production grew at a sluggish rate of 2.1 percent in September and 5.4 percent in the April-September period, while electricity output registered a good growth of 9 percent during the month under review.

Out of 22 industry groups, 15 registered positive growth in the month under review.

"Industrial growth outlook in the country has deteriorated over last few months. Uncertainty in economic environment has impacted business and consumer confidence which is reflected in the negative growth of capital goods and consumer non-durables," said Rajiv Kumar, secretary general, Federation of Indian Chambers of Commerce and Industry.

Another industry lobby, the Confederation of Indian Industry (CII) said it was time the RBI gave thought to easing interest rates to support capital investment.

"This (slowdown in industrial output) probably reflects the impact of RBI's interest rate hikes together with the continuous rise in inflation. With the global economic scenario also deteriorating, the RBI should not only pause but begin to reverse its interest rate hikes," CII director general Chandrajit Banerjee said.

Although the RBI had indicated in the last rate increase that it would hold off further increases, if inflation started coming down from December as expected, the continuing slump in industrial production growth may pressure the central bank in actually giving a break to the rate hike cycle.

Food inflation, however, still continues to reign in double digits, putting policymakers in a quandary.