Oct. 19 (Bloomberg) -- India's inflation rate fell to a five-year low as increased farm production reduced prices of fruit, vegetables and other food products.

Wholesale prices increased 3.07 percent in the week ended Oct. 6 from a year earlier, less than the 3.26 percent in the previous week, the Ministry of Commerce and Industry said in New Delhi today. Analysts had forecast inflation at 3.36 percent.

Lower food prices may not prevent inflation from accelerating in the coming months as banks increase lending in the world's second-fastest growing major economy. Bear Stearns Ltd. expects the Reserve Bank of India to maintain its bias toward curbing inflation at a policy meeting on Oct. 30.

``Excess liquidity will stoke inflation,'' said Dharmakirti Joshi, principal economist at Mumbai-based Crisil Ltd., the local unit of Standard & Poor's Ltd. ``Inflows of money from foreign investors will remain strong because India's economic fundamentals are sound.''

Joshi expects the central bank to raise its cash reserve ratio by 50 basis points to 7.5 percent on Oct. 30. The Reserve Bank has this year been relying on the cash reserve ratio, or the proportion of deposits that lenders must place with it, to curb bank loans and check demand. It has raised it four times since December, which has helped drive inflation down.

Monsoon Rains

Inflation in the first week of this month slowed mainly due to lower prices of farm products, according to today's report. India received 5 percent more rain in the June-September monsoon season than forecast by the state-owned weather bureau, improving food production. The four-month rainy season is the main source of irrigation for the country's farms.

The yield on the benchmark 10-year government bond was little changed, partly on concern the central bank will continue to keep borrowing costs high to tame inflationary pressures from consumer demand for manufactured products and higher oil prices. The yield on the 7.99 percent note due July 2017 fell 1 basis point to 7.90 percent at close of trade in Mumbai.

Indian banks can step up loans as they are flush with cash from foreign investors who bought stocks to profit from an economy that's expanded an average 8.6 percent since 2003, the fastest pace after China among the world's largest 15 economies.

The flows accelerated after the U.S. Federal Reserve's Sept. 18 interest rate cut prompted global funds to chase higher returns. Overseas investors have bought $8.2 billion more of Indian stocks than they sold since the Fed's decision, compared with $1.4 billion in the month preceding that, according to data provided by the Securities & Exchange Board of India.

Foreign Investment

Record overseas investments have also caused the rupee to strengthen 11.4 percent this year, the fastest gain in 33 years.

The Securities and Exchange Board of India, the nation's stock market regulator, on Oct. 16 proposed tightening rules for the purchase of shares and bonds through offshore derivative instruments, such as so-called participatory notes.

More than half of the $17.7 billion of the net purchases of Indian stocks this year may have been through the use of participatory notes, according to JPMorgan Chase & Co. analysts estimate. The regulator will decide Oct. 25 how to curb investments made by unregistered investors, including hedge funds, in Indian stocks.

The proposal has sparked a sell-off in equities with the benchmark Sensitive Index declining about 8 percent since Oct. 17 on the Bombay Stock Exchange.

Reserve Bank Governor Yaga Venugopal Reddy said Oct. 17 consumer prices in India are also vulnerable to higher global oil and food prices.

Crude oil surpassed $90 a barrel for the first time and is set for the biggest weekly gain since March after the dollar traded near a record low against the euro, enhancing the appeal of commodities as an investment.

India today revised the inflation rate for the week ended Aug. 11 to 4.24 percent from 4.10 percent. The government revises the inflation rate after a delay of two months on additional price data.

                       Week Ended   Week Ended   Percentage
                        Oct. 6       Sept. 29      Change

Primary articles         224.7         226.4        -0.8
Fuel, power              322.1         322.0      unchanged
Manufactured products    187.2         187.4        -0.1
Food articles            223.8         225.8        -0.9
Food products            189.1         189.3        -0.1
Edible oils              171.8         171.0         0.5
Fruits and Vegetables    251.2         261.1        -3.8
Cereals                  211.3         211.5        -0.1
Cement                   216.2         216.2      unchanged
Total                    214.7         215.1        -0.2

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

Last Updated: October 19, 2007 08:20 EDT