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More good news from everybody's favorite EM

Prashanth Vishwanathan | Bloomberg | Getty Images

India's been championing its credentials as the world's new growth engine while China stutters. Data suggest it's stepped up to the plate.

August industrial production (IP) and September consumer price inflation (CPI) figures released late on Monday underscores the resilience of the economy despite headwinds like a below-average monsoon, Citi said in a note. India's annual rainy season is a major factor for economy and this year's monsoon is being called the worst in six years, with a 14 percent rain deficit, according to local media.

Still, IP surged to a three-year high of 6.4 percent on year in August, well above consensus and strengthening further from July's revised increase of 4.1 percent. Driving the impressive reading were a 21.8 percent annual spike in capital goods and a 17 percent gain in consumer durables, the latter's third straight month of double-digit gains. Overall production is benefitting from lower commodity prices as companies in India, a net oil importer, save big on input costs.

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"While we've been careful of reading too much into the often volatile monthly variations of the IP data given the outdated base year, the trend is clearly one of improvement and hence some optimism is warranted on growth," remarked economists at ANZ in a report.

India's performance stands out among its Asian peers and the broader emerging markets sphere, where factory output remains in the doldrums.

August saw Thailand, Brazil, Japan, South Africa sink deeper into contraction territory and even among the countries experiencing expansion like China and Malaysia, the results are consistently below market forecasts. The latter country saw output rise at its slowest pace in 13 months in August.

"A rising trend in [Indian] IP, together with low inflation, positive basic balance, strengthened policy credibility, and the opening up of central and state government debt markets to foreign investors will all help keep investors bullish Indian rupee," Citi analysts said.

Economists expect India's positive economic momentum to continue, which should see the central bank keep monetary policy unchanged until early 2016. Benign inflation should help.

September CPI rose to 4.4 percent on year but that was still in line with the Reserve Bank of India's (RBI) January 2016 target of 6 percent.

A breakdown of the data reveals increased prices for pulses, fruits, and spices that make up 8 percent of the CPI basket but economists weren't worried. HSBC notes that price pressures actually softened for milk, eggs, meat, and vegetables, which make up a larger 17 percent of the CPI basket, thus lowering September's overall food inflation to 0.6 percent on month from August's 1 percent.

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"Despite two successive droughts, food prices continue to remain benign, thanks to an intriguing web of spatial distribution of rains, soft global commodity prices and prudent government policy back home."

Further support from a government spending-led boost to infrastructure investments, lower financing costs and easing inflation are expected to underpin the upturn, Radhika Rao, DBS economist, told CNBC.

But she warns that the recovery hinges on structural tailwinds.

"This is just the beginning of a cyclical rebound, government reforms focused on land, labor, and capital need to be untangled to revive the overall manufacturing sector and make current economic gains sustainable."