Oct. 5 (Bloomberg) -- India's inflation unexpectedly accelerated for the first time in six weeks as prices of steel, chemicals and other manufactured products rose.

Wholesale prices increased 3.42 percent in the week ended Sept. 22, compared with a 3.23 percent gain in the previous week, the Ministry of Commerce & Industry said in New Delhi today. Analysts expected inflation to slow to 3.20 percent.

The Reserve Bank of India is concerned inflation may accelerate as record foreign investment has increased the cash available for commercial banks to lend. The central bank yesterday increased the limit on the sale of bonds this year to drain excess money supply and check price gains.

``Higher liquidity leads to inflationary pressure,'' said Dharmakirti Joshi, the Mumbai-based principal economist at rating company Crisil Ltd., the local unit of Standard & Poor's. ``The central bank would be looking at the upside risks to inflation. If the kind of inflows we have seen so far continues, they will have to raise the cash reserve ratio.''

India's central bank has been relying on the cash reserve ratio, or the proportion of deposits that lenders need to place with it as reserves, to curb bank lending and check consumer demand. It has raised it four times since December, which has helped slow loans growth and inflation.

Joshi expects the Reserve Bank to raise the ratio again as early as Oct. 30, the scheduled date for the central bank's next monetary policy announcement.

Bond Yields

Ten-year bonds declined, pushing the yield to a one-month high, after the central bank signaled it will sell more short- term debt, reducing the amount of funds available to buy existing securities. The yield on the benchmark 7.99 percent bond due July 2017 gained 2 basis points to 7.91 percent in Mumbai, the highest since Aug. 30, according to the central bank's trading system.

India and China, the two fastest-growing major economies, are restricting bank lending even as other central banks including the U.S. Federal Reserve and the Bank of England are either cutting their benchmark rates or keeping them on hold.

China raised interest rates on Sept. 14 for the fifth time since March to curb the fastest inflation since 1996. China is flooded with cash from a trade surplus that reached a record $161.8 billion in the first eight months of this year, pushing up consumer prices at twice the central bank's target pace and raising the risk of asset bubbles.

Overseas investors bought a net 5.75 billion rupees ($140.9 million) of Indian shares yesterday, taking their total equity purchases this year to a record $14.54 billion, the stock market regulator said.

Stocks, Rupee

Foreign share-buying has pushed stocks up 29 percent this year to near an all-time high, causing the rupee to jump 12 percent, the fastest gain in at least 33 years.

To stem the currency's gain and protect exports, which make up a third of India's economy, the central bank sold rupees worth $21 billion in the first four months of this fiscal year, almost equal to last year's entire sales, causing money supply to expand.

The rupee rose 0.9 percent to 39.491 against the dollar this week at the 5 p.m close in Mumbai, according to data compiled by Bloomberg.

Foreign investors are buying shares and building factories in India to take advantage of the nation's record growth. South Asia's largest economy has grown an average 8.6 percent in the past four years.

India today revised the inflation rate for the week ended July 28 to 4.70 percent from 4.45 percent. The government revises the inflation rate after a delay of two months on additional price data.

To contact the reporter on this story: Cherian Thomas in New Delhi at cthomas1@bloomberg.net.

Last Updated: October 5, 2007 11:17 EDT