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NEW DELHI : India's inflation rate accelerated to a 44-month high of nearly eight percent on Friday, dealing a fresh blow to the government which fears a voter backlash.
Annual inflation climbed more than two-tenths of a percentage point to 7.83 percent for the week ended May 3 from 7.61 percent the previous week, according to the Wholesale Price Index, India's closest watched cost monitor.
The rise, which exceeded analysts' expectations of around 7.5 percent, was mainly due to price increases of staple foods like fruits and vegetables and manufactured goods.
Both India and China, whose economies are the world's two swiftest expanding, are battling to wrestle down inflation, which has been fed by high food costs and demand from increasingly affluent consumers.
India's inflation rate was last hovering around the 7.8 percent mark in September 2004 while China's inflation is already close to 12-year highs of 8.5 percent.
India's inflation "situation is indeed worrying," said Finance Minister Palaniappan Chidambaram, who warned steel and cement manufacturers of more unspecified "administrative measures" if price cuts they have announced are not enough to help tame inflation.
The steel and cement sectors account for 12 per cent of overall inflation. The government has already slashed import duties on steel and slapped export duties on steel products to boost domestic supplies.
Inflation could be headed even higher, especially with the rupee declining against the dollar amid slackening foreign appetite for Indian assets -- making imports more expensive, analysts warned.
The value of the Indian currency was trading at 13-month lows of 42.6 rupees to the dollar after the inflation numbers stoked fears of more monetary tightening that would slow the economy further and prompt a flight of foreign investor funds.
The rupee looks set for its worst monthly decline in a decade, say analysts who forecast the currency could weaken to 43 to the dollar in coming weeks.
"If oil and food commodity prices continue to rise, there is a significant risk that inflation will hit double-digits in the not-too-distant future," said Robert Prior-Wandesforde, analyst at HSBC in Singapore.
He forecast a 25 basis point rise in India's leading repo short-term borrowing rate, already at a six-year high of 7.75 percent, later this year. The Congress-led government has taken a series of steps in a bid to cool inflation to around four percent to shield India's poverty-stricken masses from inflation before it faces a general elections due in a year.
It has reduced import levies and suspended futures trading in staple foods such as chickpeas and wheat. Futures contracts involve betting on future price movements of such items as commodities and shares.
The central bank has also been on an aggressive monetary tightening drive which has slowed the growth of Asia's third-largest economy.
Industrial output grew at its slowest pace in six years in March as tighter credit to stem rising inflation hit manufacturing, data this week showed.
Foreign fund share sales have totalled a net 2.51 billion dollars so far this year compared with purchases of 2.87 billion dollars during the same period in 2007.
- AFP /ls
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