UPDATE 3-Indian inflation jumps again, tighter policy seen

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By Rajkumar Ray

NEW DELHI, July 4 (Reuters) - Indian inflation accelerated to 11.63 percent in late June, above forecasts and its highest since the series began in 1995, raising the likelihood of an interest rate increase this month to follow two in June.

The data was leaked early to newspapers, sending the benchmark 10-year bond yield to a seven-year high of 8.99 percent in morning trade as inflation topped a consensus forecast of 11.44 percent and is now expected to exceed 12 percent soon.

The Reserve Bank of India (RBI) raised its key repo rate twice in June to a six-year high of 8.5 percent to deter second-round price rises following increases in the cost of fuel, raw materials and food on world markets.

Economists polled by Reuters last week expected the central bank to raise the rate another 25-50 basis points in the fiscal year to March.

"The momentum in inflation continues to accelerate and that is a worrying sign. With rising input costs, there is a lot of pressure on producers to increase output prices," said Sonal Varma, an economist at Lehman Brothers in Mumbai.

"Given this risk of second-round effects, we expect the RBI to hike the repo rate by 25 basis points at the July policy review, and the cash reserve ratio by 50 basis points in Q3 2008."

The cash reserve ratio is the proportion of funds banks have to keep on deposit with the central bank. It is due to rise to 8.75 percent in two 25-basis-point stages on July 5 and July 19.

NOT THE ONLY ONE

The RBI holds its next review on July 29. It is not the only central bank in Asia struggling to keep price pressures down. Those in Indonesia, the Philippines, Taiwan and Vietnam have all raised rates in the past couple of months.

The surge in inflation has heaped pressure on the communist-backed coalition government before state elections later this year and federal polls scheduled for 2009.

The government has cut duties on crude oil and other items, and curbed exports of rice as it grapples with one of the biggest policy problems of its four years in power.

Oil prices touched a record this week above $145 a barrel and a senior Indian oil ministry official said the country would next review government-set fuel prices in October. They were last increased in June, dramatically fuelling inflation.

Rupa Rege Nitsure, chief economist at Bank of Baroda, said the effects of the June fuel price rise, as well as higher money supply growth, were boosting inflation. "I see it peaking at about 13.5-14 percent in early October," she said.

The wholesale price index INWPI=ECI, India's most widely watched measure, rose 11.63 percent in the 12 months to June 21, above the previous week's annual rise of 11.42 percent.

For a graphic of inflation click here

The wholesale price index is more closely watched than the consumer price index, which is published monthly, because it covers a higher number of products and is published weekly. (Additional reporting by the MUMBAI treasury team; Editing by Mark Williams)