Nov. 8 (Bloomberg) -- India's inflation rate fell below 3 percent for the first time in more than five years after the government refrained from raising fuel prices this year, when crude oil rallied to a record.

Wholesale prices rose 2.97 percent in the week ended Oct. 27 from a year earlier compared with a 3.02 percent gain in the previous week, the Ministry of Commerce and Industry said today in New Delhi. Analysts had forecast inflation at 3.06 percent.

Capping fuel prices will cost the government about $12 billion in the two years ending March 31, equal to almost a 10th of India's annual budget. India may next week allow the first increase in fuel prices this year, letting state-run refiners to partly pass on the record rise in crude oil costs to consumers, Oil Minister Murli Deora said yesterday.

``The inflation rate will be higher by 1.5 percentage points if the entire increase in oil prices is allowed to be passed through into the economy,'' said Robert Prior-Wandesforde, senior Asian economist at HSBC Group Plc in Singapore. ``It is too early to say interest rates have peaked in India.''

The benchmark 10-year government bond yield was unchanged after the inflation data was announced. The yield on the 7.99 percent bond due July 2017 held at 7.91 percent.

India hasn't allowed refiners to raise prices this year on concern it will accelerate inflation before state and national elections.

`Suppressed' Rate

Reserve Bank of India Governor Yaga Venugopal Reddy, while maintaining its policy rates at a 5 1/2-year high last week, described the current inflation rate as ``suppressed'' because it does not reflect the rise in oil price to records.

India's central bank Oct. 30 unexpectedly ordered lenders to set aside more reserves for the fourth time this year to contain inflation. Reddy reiterated the bank aims to contain inflation below 5 percent by March 31.

Refiners, including Indian Oil Corp., the country's biggest, had sought a 15 percent rise in diesel prices and 6.7 percent in gasoline in early September when oil process averaged $75.3 a barrel.

Crude oil prices have risen 52 percent this year, inching close to $100 a barrel.

China on Nov. 1 unexpectedly increased fuel prices by as much as 10 percent in an ``urgent step'' to help the nation's oil refiners cover surging crude costs. The country's rate of inflation fell in September to 6.2 percent from an almost 11-year high of 6.5 percent the previous month.

India today revised the inflation rate for the week ended Sept. 1 to 3.72 percent from 3.52 percent. The government revises the figure after a delay of two months on additional price data.

                       Week Ended   Week Ended   Percentage
                        Oct. 27       Oct. 20      Change

Primary articles         224.5         225.0        -0.2
Fuel, power              323.7         323.7      unchanged
Manufactured products    187.6         187.4         0.1
Food articles            224.4         225.0        -0.3
Vegetables               235.5         248.2        -5.1
Food products            189.6         189.0         0.3
Edible oils              173.0         172.2         0.5
Cement                   220.2         220.2      unchanged
Total                    215.1         215.1      unchanged

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

Last Updated: November 8, 2007 03:51 EST