Sept. 14 (Bloomberg) -- India's inflation slowed to a two- year low, adding to optimism the central bank may not immediately increase borrowing costs.

The wholesale price index was 3.52 percent in the week to Sept. 1, the lowest since Aug. 27, 2005, compared with 3.79 percent the previous week, the Ministry of Commerce & Industry said today in New Delhi. Inflation data is typically revised up two months later.

Economists expect the Reserve Bank of India to leave borrowing costs unchanged next month after three years of interest-rate increases. Besides slowing inflation, India's industrial production in July grew at the slowest pace in nine months as higher rates weakened consumer demand.

``The central bank is poised to be less aggressive in maintaining tight liquidity conditions,'' said Rajeev Malik, senior economist at JPMorgan Chase & Co. in Singapore. ``There are risks to the inflation outlook, but we believe inflation is likely to remain below the central bank's comfort level.''

Ten-year bond yields, which move inversely to prices, fell for a fourth week as wholesale prices rose the least in two years. The yield on the benchmark 10-year government bonds fell by 2 basis points this week to 7.86 percent at 5:30 p.m. in Mumbai, according to the central bank's trading system.

Malik expects the Reserve Bank, which wants to contain inflation below 5 percent in the year ending March 31, to keep its benchmark interest rates and the cash reserve ratio unchanged in its next monetary policy statement on Oct. 30. The cash reserve ratio is the proportion of deposits that commercial banks need to place with the central bank as reserves.

Monetary Measures

India's monetary measures helped lower the nation's inflation rate from a two-year high reached in January, C. Rangarajan, the chairman of a panel that advises Prime Minister Manmohan Singh on economic affairs, said Sept. 12.

The central bank raised its policy rates by 2.25 percentage points in the past three years and since December has increased the cash reserve ratio by 2 percentage points to 7 percent.

As a result, loans to consumers and companies grew at the slowest pace in three years last month. Industrial production in July rose 7.1 percent from a year earlier, the weakest pace since October 2006.

Still, the central bank last month said inflation concerns persist because of rising commodity prices and demand for goods exceeding supply.

Crude Oil, Wheat

Crude oil yesterday rose to a record $80.09 a barrel in New York, while the price of wheat, which India has been importing in the past year, touched a record $9 a bushel this week.

Rising incomes in India, the world's second-most populous country after China, is helping prop up demand for cars, homes and electrical appliances. The central bank forecasts the economy will grow 8.5 percent this year, almost matching the record average expansion of 8.6 percent since 2003.

Tata Steel Ltd., the world's sixth-largest steelmaker, said this month it plans to raise prices of hot-rolled coils by as much as 500 rupees ($12) a metric ton because of rising demand from automakers and other consumers.

The government today revised the inflation rate for the week ended July 7 to 4.61 percent from 4.27 percent. The government revises the inflation rate after a delay of two months on additional price data.

                       Week Ended   Week Ended   Percentage
                        Sept. 1       Aug. 25      Change

Primary articles         227.5         224.5         1.3
Fuel, power              321.9         322.1        -0.1
Manufactured products    185.9         185.6         0.2
Food articles            227.7         223.3         2.0
Food products            186.7         186.6         0.1
Edible oils              169.9         170.9        -0.6
Fruits                   258.6         219.7        17.7
Vegetables               266.1         268.2        -0.8
Pulses                   245.6         246.5        -0.4
Total                    214.4         213.6         0.4

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

Last Updated: September 14, 2007 08:58 EDT