The rupee has been slowly strengthening on the currency market and the Indian stock exchange hit a record high after the announcement.
"The markets saw a fresh buying spurt following the economic growth data," said Hiten Mehta, a fund manager with Fortune Financial Services.
India's new economic data is an upward revision of the central bank's earlier forecast of between 8.5 per cent and 9.0 per cent and higher than the 8.6 per cent forecast by economists in a Reuters poll.
However, India, which has seen an average growth rate of 8.3 per cent over the past three fiscal years, still lags behind China, which recorded growth of 10.7 per cent in 2006.
India's economy is dominated by manufacturing and services, with services making up more than 50 per cent of India's GDP.
Manufacturing output growth was estimated at 11.3 per cent, compared with 9.1 percent a year ago, while services was estimated to grow at 11.2 per cent in 2006/07, compared with 9.8 per cent the year before.
Farming, which generates a fifth of GDP and employs about 60 per cent of the population, was estimated to grow 2.7 per cent in 2006/07.
D K Joshi, senior economist with rating agency Crisil, said the growth looked more sustainable than in previous cycles because it was backed by a high investment rate, good consumption and export demand.
But he and other analysts expected growth to moderate in coming quarters and some said the new figure could be revised down to just below 9 per cent later on.
|India continues to struggle with a population |
of 260 million poor [GALLO/GETTY]
Rapid credit growth in India has mean an increasing demand for houses, cars and consumer goods.
As demand increases and capacity is squeezed, inflation has risen, now standing at a two-year high above 6 per cent.
The central bank raised its key lending rate last week to 7.5 per cent, a four-year high, following four increases in 2006, in an attempt to bring inflation under control.
Joshi said the central bank was continuing to raise interest rates to cool inflation. "The numbers mean further monetary tightening is in store," he said.
Tata Steel's recent $12.2bn takeover of Corus, the Anglo-Dutch steel maker, captured the business world's attention and the Times of India has been running a campaign called "India Poised", but India's infrastructure is straining under the economic boom and the government continues to struggle with a large fiscal deficit and a population of 260 million poor.
Manmohan Singh, the Indian prime minister, had set a target of 10 per cent growth for India, but in December last year admitted that the country's troubled rural economy and inadequate public services would make it difficult to achieve that goal.