Annual inflation heads towards 8 pct

By Rajkumar Ray

NEW DELHI (Reuters) - 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 government and Reserve Bank of India have taken steps in recent weeks to calm inflationary pressures in Asia's third-largest economy, and the finance minister said he expected inflation to moderate once cuts in steel and cement prices flowed through.

The surprise jump, which stemmed from higher prices of industrial fuel, metal products and some food items, briefly sent the rupee to a 13-month low against the dollar and the 10-year bond yield to its highest in more than two weeks.

"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.