Inflation at 11.63 pct, tighter policy seen

NEW DELHI (Reuters) - 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 hikes 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 early trade as inflation topped a consensus forecast for 11.44 percent and is now expected to rise beyond 12 percent soon.

The Reserve Bank of India (RBI) raised its key lending rate twice in June, taking it to 8.5 percent.

Economists polled by Reuters last week expect the central bank to raise the rate, known as the repo, by 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, 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.

The RBI holds its next review on July 29.

The wholesale price index, 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.