Image copyright AFP Image caption Harvests were better than expected despite a weak start to the monsoon

India's economy grew by 5.3% in the July-to-September period from a year earlier, down from a rate of 5.7% in the previous quarter.

Although the rate was slower than earlier in the year, it was still better than many analysts had expected.

The figures cover the first full quarter under the government of Prime Minister Narendra Modi.

Both the service sector and agriculture performed better than anticipated, despite a weak start to the monsoon.

Investors were also encouraged by the news that the government is to cut its holdings in state-run banks, such as State Bank of India.

Interest rate cut

"The GDP growth number is slightly better than we expected," said Shivom Chakrabarti, senior economist at HDFC Bank in Mumbai.

"Overall, the economy has bottomed out and there is a slow and modest recovery. Now the onus is on the government to boost growth by reviving the investment climate and get reforms moving."

Observers had predicted the economy would grow at a rate of just 5.1% in the quarter.

Despite the slightly stronger-than-expected figure, pressure is mounting on India's central bank, the Reserve Bank of India, to cut interest rates, possibly as early as the next policy review meeting on 2 December.

The benchmark interest rate has been kept at 8% since last January in an effort to curb inflation. India has a history of high inflation, but recently the rate dipped below 6%.

So far central bank governor Raghuram Rajan has resisted calls to lower interest rates to stimulate growth in Asia's third-largest economy.

Most analysts expect him to wait until the spring to change rates.

Image copyright AFP Image caption Consumer price inflation of ordinary food and goods has eased raising expectations of a cut in interest rates

Analysis: Sameer Hashmi, BBC India business reporter

When Narendra Modi swept to power back in May he promised to revive the economy.

Since then leaders including David Cameron and Xi Jinping have led trade delegations to India.

Top chief executives like Mark Zuckerberg from Facebook and Microsoft's Satya Nadella have also visited.

Many international firms have announced investment plans and the Indian stock market has been soaring. All this excitement has been attributed to the 'Modi effect.'

But many had expected the government to unleash some big bang economic reforms by now, which hasn't happened.

Though they have taken some steps in that direction, the economy still faces some fundamental challenges especially in the energy and infrastructure sectors.

The government is in the process of addressing some of the concerns but most economists warn that the steps taken in the last few months will have an impact only in 12 to 18 months time.

Image copyright AFP Image caption Children carry coal to be crushed: Prime Minister Modi has promised to reform the coal sector

Bank sales

On Friday, the government also confirmed its commitment to reducing some of its holdings in public sector banks, although the state will retain a majority holding.

The sale would raise about 891.2bn rupees ($14.4bn; £9.1bn).

Indian banks are saddled with high levels of bad debts and corporate governance issues and will require tens of billions of dollars of financial support over the next few years.

The government currently holds stakes ranging from 56% to 84% in 24 of India's state-run banks.