May 30 (Bloomberg) -- India's inflation accelerated at the fastest pace in more than 3 1/2 years, maintaining pressure on the government to do more to tame prices which threatens economic growth. Bonds fell.

Wholesale prices jumped 8.1 percent in the week ended May 17 from a year earlier, Finance Minister Palaniappan Chidambaram told reporters in New Delhi today. Economists had expected a 7.96 percent increase. The current level of inflation was ``worrisome,'' the minister said.

Faster inflation is preventing Governor Yaga Venugopal Reddy from cutting interest rates from near a six-year high to spur economic growth, which is forecast by the central bank to weaken to the slowest since 2004. Inflation is unlikely to ease in the coming months amid record energy and commodity prices.

``Higher inflation is constraining the flexibility the Reserve Bank of India has with interest rates to prop up the economy,'' said Dharmakirti Joshi, an economist at Mumbai-based Crisil Ltd., the local unit of Standard & Poor's. ``The Reserve Bank will maintain high interest rates.''

Bond prices fell after the inflation figure was released. The price of the benchmark 8.24 percent note due April 2018 fell as low as 100.91 per 100 rupee face amount as of 12:28 p.m. in Mumbai from 101.33 earlier.

Slower Growth

India's economy expanded 9 percent in the year ended March 31, slower than 9.6 percent in the previous 12 months, a separate report showed today. Asia's third-largest economy grew 8.8 percent in the three months to March from a year earlier, matching the pace of the previous quarter.

Inflation in India is being fueled by higher energy and commodities prices, Shubhashis Gangopadhyay, an adviser to Chidambaram, said May 28.

Crude oil prices have doubled from a year ago and touched an all-time high of more than $135 a barrel on May 22, raising concern India's import costs will rise. The South Asian nation relies on crude oil from overseas to meet three-quarters of its energy needs.

The index of fuels, with 14 percent weight in the inflation basket, rose 7.79 percent from a year earlier, today's report showed. The index of manufactured products gained 7.84 percent. Prices of dairy products increased 11 percent, fruits and vegetable prices rose 4.2 percent.

Oil Prices

Inflation in India is suppressed as it doesn't reflect the complete impact of higher crude oil prices, Joshi of Crisil said.

Indian Oil Corp., the nation's biggest refiner, reported its first quarterly loss in more than two years as the government forced refiners to sell fuels below cost to cushion consumers and contain inflation. The company posted a loss of 4.14 billion rupees ($97 million) in the three months ended March 31.

Inflation may accelerate further as 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 March 22 to 7.85 percent from 7 percent.

Reddy has raised the Reserve Bank's cash reserve ratio seven times since December 2006 and increased its key overnight lending rate seven times in the past 2 1/2 years. The central bank last month raised the reserve ratio unexpectedly twice to a seven-year high to curb loans growth and prevent demand pressures from adding to inflation.

Election Woes

``The Reserve Bank of India will hold on hiking headline policy rates,'' Vishnu Varathan, economist at Forecast Singapore Pte said. ``I think they are going to manage liquidity much more prudently to ensure that inflation doesn't spiral up.''

Rising prices may threaten Prime Minister Manmohan Singh's re-election bid in a vote due before May 2009. Singh's Congress party this week lost an election in the southern state of Karnataka, the ninth setback in the 11 provincial polls held since January 2007.

Over the past two months, the government scrapped import duties on edible oils, steel products and banned the export of cement, pulses, rice, wheat and edible oil to contain prices.

``The government will take more measures if needed to contain inflation,'' Chidambaram said.

                       Week Ended    Week Ended     Percentage
                         May 17        May 10        Change
Primary articles         240.9         239.8           0.5
Fuel, power              347.2         345.8           0.4
Manufactured products    199.4         199.2           0.1
Food products            204.6         203.8           0.4
Edible oils              185.3         186.1          -0.4
Cement                   219.5         220.8          -0.6
Pulses                   241.6         240.4           0.7
Fruits & vegetables      255.3         249.0           2.5
Total                    229.6         229.0           0.3

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

Last Updated: May 30, 2008 03:33 EDT