UPDATE 1-India's industrial output growth rises in August, still weak

* Industrial output up 2.7 percent in August

* Government wants RBI to ease policy at Oct. 30 meeting

* CPI inflation slows to 9.73 pct in September

(Adds details, market reaction)

NEW DELHI, Oct 12 (Reuters) - India's industrial output rosemodestly in August but not enough to end a long slump in Asia'sthird largest economy, while inflation slowed, improving thecase for a cut in interest rates that both businessmen andpoliticians have been pleading for.

Data released by the Central Statistics Office (CSO) onFriday showed output at factories, mines and utilities rose anannual 2.7 percent, with the growth driven by consumer goods.That was higher th a n a forecast of 1.1 percent in a Reuters polland even beat the most optimistic forecast.

Manufacturing, which accounts for the bulk of industrialproduction and contributes about 15 percent to overall GDP, rose2.9 percent in August from a year ago.

India has a long way to go before it bounces back to thestellar growth rates of the past, having slid since Februaryinto a phase of stagnation that has become the worst since thedepths of a global crisis three years ago.

The government and businessmen are pleading with the ReserveBank of India (RBI) to lower rates, which are the highest amongthe major economies, at its next quarterly policy review on Oct.30.

But many economists believe it will stick to its guns untilmore action is taken to control government spending and lowerinflation.

"We would be cautious in saying this marks a revival ingrowth. Unless the impediments to investment are removed, thereis unlikely to be a significant turnaround in the near future,"said Jyotinder Kaur, economist at HDFC bank in New Delhi.

"From the central bank's policy point of view, the headlineinflation number remains crucial, and the factory output printcoming a little higher than expected is not going to make a bigdifference."

India's annual consumer price inflation fell inSeptember to 9.73 percent from 10.03 percent in August, drivenby a marginal fall in fuel and food prices, data showed onFriday. The more widely-watched wholesale price index numbersare released on Monday.

A Reuters poll this week forecast headline WPIinflation accelerating to 7.7 percent in September after thegovernment cut fuel subsidies to tackle the deficit.

A slew of economic reforms in recent weeks was partly aimedat convincing the central bank to ease monetary policy.

<^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^ INSTANT VIEW-Analysts' reaction: GRAPHIC-IIP, exports: TABLE-August output data: POLL-Worst may be over - if reforms stick ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^>

Indian markets showed muted reaction to the data. The10-year bond yields briefly fell, but thenrecovered to 8.17 percent, the rupee weakened slightlyto 52.75 from 52.70 before the data, while the BSE index

was still slightly lower.

Both the 1-year and 5-yearswap rates edged down 1 basis point each to 7.60 and 6.99percent respectively.

(Reporting by Manoj Kumar; Editing by Simon Cameron-Moore)

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Keywords: INDIA ECONOMY/