July 24 (Bloomberg) -- India's inflation rate unexpectedly fell for the first time in two months as the highest interest rates in more than six years slowed consumer demand for cars and houses, checking price increases in steel and cement.

Wholesale prices rose 11.89 percent in the week to July 12, after gaining 11.91 percent in the previous week, the commerce ministry said in New Delhi today. Economists had expected a 12.03 percent increase.

Inflation is still at double the central bank's goal, which may force the Reserve Bank of India to increase interest rates for the third time in less than two months at its July 29 meeting. Prime Minister Manmohan Singh won a key parliamentary vote this week, securing the tenure of the government and time to contain the fastest inflation since 1995.

``The central bank will raise rates as inflation remains way above its comfort zone,'' said Robert Prior-Wandesforde, an economist at HSBC Group Plc in Singapore. ``We are looking for the headline rate to hit 15 percent by the end of fiscal 2008.''

The Reserve Bank raised its benchmark interest rate twice in June, lifting it to more than a six-year high of 8.5 percent to contain inflation. It also increased the cash reserve ratio in a phased manner to 8.75 percent, the last increase coming into effect on July 19.

Sales at Maruti Suzuki India Ltd., the country's biggest carmaker, rose 2.2 percent in June compared with a 16 percent gain in May, the company said this month. The inflation index of manufactured products fell to 10.72 percent in the week to July 12 from 10.79 percent in the previous week, according to today's statement.

Bond Yield

The yield on the benchmark 10-year government bonds rose 3 basis points to 9.05 percent at the 5:30 p.m. close in Mumbai after the government sold the benchmark debt at a higher-than- expected yield at an auction today.

India will rely on monetary measures to tackle inflation, which is accelerating due to the cost of imported oil and other commodities, Finance Minister Palaniappan Chidambaram said yesterday. ``Anything that is imported adds to our inflation and the answer is to take monetary measures,'' he said.

Rising energy and commodity costs have stoked inflation across the Asia-Pacific region. Consumer prices in Singapore rose 7.5 percent in June from a year earlier, holding at a 26-year high for the third straight month, a report showed yesterday.

``Inflation, on a week-on-week basis, has continued to remain stable,'' the finance ministry said in a release issued in New Delhi today.

Confidence Vote

Singh had to demonstrate his strength in parliament after his communist allies withdrew support on concern a nuclear accord with the U.S. would weaken the nation's foreign policy. Singh got 275 votes in favor while 256 went against him in the confidence motion on July 22.

``Our effort is to control inflation without hurting the rate of growth and employment,'' Prime Minister Singh said this week. India needs to grow at least 10 percent a year to get rid of chronic poverty, ignorance and disease which still afflict millions of people, Singh told parliament.

India's central bank expects the economy to grow as much as 8.5 percent in the current fiscal year, slower than the 9 percent pace of the previous 12 months. The $912 billion economy has posted 8.9 percent average annual growth since 2005, the fastest in the world after China.

The government may revise today's preliminary wholesale- price estimate in two months after receiving additional data. The commerce ministry today raised its inflation estimate for the week ended May 17 to 8.66 percent from 8.10 percent.

To contact the reporters on this story: Cherian Thomas in New Delhi at cthomas1@bloomberg.net; Kartik Goyal in New Delhi at kgoyal@bloomberg.net.

Last Updated: July 24, 2008 10:05 EDT