* India March qtr GDP up 5.8 pct vs 5.2 pct forecast
* India 2008/09 growth 6.7 pct vs 6.5 pct forecast
* Robust services sector offset sagging factory output
* Slowdown may have bottomed, no more rate cuts seen
(Adds fiscal deficit data in para 11-12, stock market close para 13)
By Rajkumar Ray and Surojit Gupta
NEW DELHI, May 29 (Reuters) - India's economy grew faster than expected in the March quarter, helped by strength in farm and services sectors that suggested Asia's third-largest economy has already turned the corner and may be set for an early recovery.
"The economy has clearly performed better than expectations despite very challenging credit conditions," said Han-Sia Yeo, currency and rates strategist at Australia and New Zealand Banking Group in Singapore.
The Indian economy grew 5.8 percent from a year earlier in January-March, matching the upwardly revised rate in the previous quarter, data showed on Friday. That was still the lowest in four years, but above analysts' forecast of a 5.2 percent annual expansion.
October-December growth was revised from 5.3 percent.
India does not publish seasonally-adjusted quarter-on-quarter growth figures, but analysts' estimates showed the economy grew 1.2 percent in the quarter compared with a stagnant reading in September-December.
In the whole of the 2008/09 fiscal year to March 31, India's economy grew 6.7 percent, its weakest in six years and well below rates of around 9 percent of the previous three years, but still faster than predicted by economists in a Reuters poll.
The data fanned hopes that India was already on the mend, unlike other major economies that suffered a disastrous January-March quarter and have yet to show hard evidence of improvement.
Unlike most Asian economies, which heavily rely on exports to sustain economic growth, India is driven by domestic demand. But it still suffered a sharp slowdown in late 2008 as job cuts at exporters and outsourcing firms as well as the drying up of investment flows soured consumer and business sentiment.
Exports account for only about 15 percent of India's GDP, less than half the levels in China and Japan.
"I think the GDP upgrade cycle has just started. We are past the eye of the storm," said Rajeev Malik, economist with Macquarie Capital in Singapore.
Generous spending planned when growth was strong and support packages for industry when things soured saw the fiscal deficit ballon to 6.2 percent of gross domestic product in 2008/09, more than double a Feb 2008 estimate of 2.5 percent and a revised target of 6 percent, separate data showed.
The large fiscal deficit has been undermining central bank efforts to keep interest rates low to support growth.
(For a graphic on India's GDP trend, click on: http://graphics.thomsonreuters.com/059/IN_GDP0509.jpg)
MARKETS CHEER
Indian stocks ended up 2.3 percent <.BSESN> and the rupee
"I think policy rates have bottomed out so the next move for the policy rate is upwards," said A Prasanna, chief economist at ICICI Securities primary dealership in Mumbai, who predicted rates would stay on hold over the next 6-9 months.
March quarter growth was only slightly below the 6.1 percent expansion reported by China, Asia's second-largest and the world's third-largest economy, which for years has served as the world's main growth engine.
India's central bank expects growth of about 6 percent for the whole of current 2009/2010 fiscal year.
Some analysts are more optimistic, predicting the economy will gain steam in the second half of the year with the government, strengthened after general elections, seen announcing more spending to rev up growth.
RESILIENT SERVICES
The breakdown of GDP data showed manufacturing continued to suffer, with output falling 1.4 percent in the March quarter after a 0.9 percent rise in the final three months of 2008.
But services, which account for 57.3 percent of GDP, expanded by 8.6 percent in the quarter and 9.7 percent in the whole of the fiscal year, while farm output rebounded with a growth of 2.7 percent after declining 0.8 percent in the previous quarter.
The global financial markets rout had also prompted banks to hoard cash, making credit scarce and expensive, despite the central bank's efforts to ease the squeeze by pumping funds into the banking system and slashing interest rates.
But analysts and officials noted signs of easing funding conditions as well industrial recovery, with data such as car sales and cement output suggesting a pick-up in demand.
"There are some signs of industrial revival," Anand Sharma, the new commerce and industry minister, told reporters. (Additional reporting by Saikat Chatterjee and C.J. Kuncheria) (Writing by Tomasz Janowski; Editing by Kim Coghill)