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REUTERS, NEW DELHI - India's annual inflation rate headed towards 8 percent in early May, clocking a 3-1/2-year high, but analysts said it was unlikely to provoke more monetary tightening for now as economic growth appeared to be slowing.
The wholesale price inflation rate, India's most widely watched measure, rose 7.83 percent in the 12 months to May 3, its highest since November 2004 and above a median forecast of 7.50 percent in a Reuters poll.
The surprise jump, stemming from higher prices of industrial fuel, metal products and some food items, comes despite a series of measures by the government and the Reserve Bank of India (RBI) to calm inflationary pressures in Asia's third-largest economy.
"I think pressures will persist in coming weeks and (inflation) will prevail above 7 percent for the next three to four months," said D.K. Joshi, principal economist at domestic rating agency Crisil in Mumbai.
"It's a Catch-22 situation as they (the central bank) have to manage slowing growth and rising inflation. It's a tough task."
Industrial output growth slowed to an annual 3 percent in March, its weakest in six years, according to data this week, sparking concerns about a wider slowdown in the economy.
In afternoon trade, the 10-year bond yield had risen four basis points since the inflation data to 7.90 percent and the partially convertible rupee weakened to a 13-month low of 42.92 per dollar.
Many analysts expect inflation to remain high and say it could climb to 8 percent in coming weeks. In addition, previous weeks' readings have consistently been revised higher.
On Friday, the inflation rate for March 8 was revised up to 7.78 percent from a provisional 5.92 percent.
"The particularly striking feature of today's release is the extraordinary upward revision. It's pretty clear that inflation is not 7.8 percent, maybe 9 percent at the moment and rising," said Robert Prior-Wandesforde, an economist at HSBC in Singapore.
He did not expect the RBI to act just yet, but if inflation hit double digits, he expected the central bank to raise rates and tighten cash conditions around July-September, although he doubted that would be very effective.
"Against that background, it is going to be hard for the RBI to resist doing something more," he said. GROWTH VERSUS INFLATION
Finance Minister Palaniappan Chidambaram has said he was ready to sacrifice a bit of growth to ease price pressures, but this week the deputy chairman of the Planning Commission said the government was not sacrificing growth to calm inflation.
Some analysts said measures taken to curb price pressures, including import duty cuts, curbs on some exports and increases in banks' reserve requirements, could see inflation moderate.
"I think inflation is headed lower from current levels and in three months we expect inflation to be 50 basis points lower," said Anupam Rastogi, principal policy adviser at IDFC in Mumbai.
"I don't think policy makers will take further steps to control inflation, as latest economic data are already showing signs of slowing down."
Policy makers expect economic growth to slow to 8.0-8.5 percent in the 2008/09 fiscal year that began in April, down from an estimated 8.7 percent in 2007/08 and an 18-year high of 9.6 percent in 2006/07
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