Inflation eased slightly in January but was still higher than expected, reinforcing expectations the Reserve Bank of India (RBI) will keep tightening policy because price pressures are still above its comfort zone.

India suffers from the highest inflation of any major Asian economy even after raising rates seven times in a year.

Global food prices are at record highs and crude oil is on the rise, while India's poor infrastructure and low agricultural productivity add to inflationary pressures.

The wholesale price index (WPI), India's main inflation gauge, rose 8.23 percent in January from a year earlier, compared with an 8.05 percent estimate in a Reuters poll.

The index rose 8.43 percent in December from a year earlier.

Food prices in the WPI index jumped 15.7 percent in January compared with 13.6 percent in December, leading to fears that food inflation was leading to sustained price rises in other sectors of the $1.3 trillion economy.

This is still a very elevated level and above consensus, said Dariusz Kowalczyk, senior economist and strategist at Credit Agricole CIB in Hong Kong.

We are not convinced that inflation will decline as the RBI is projecting and more tightening from RBI (the central bank) is likely during the course of the year to control inflation expectations.

The one-year swap rate rose 2 basis points to 7.45 percent after the data, while the benchmark five-year swap rose 2 basis points due to the January data being higher than expected.

WORRIES

The government is increasingly worried high inflation could eat into growth, with signs investor confidence in Asia's third largest economy is waning amid a lack of economic reforms and a telecoms graft scandal that has weakened the ruling coalition.

High food prices, such as for vegetables, have become a lightening rod for voter anger. That could hurt the government in state elections this year that will help define the strength of the ruling coalition for the rest of its term.

A Times of India poll on Sunday showed that rising inflation had eroded the home budgets of many Indians and that many voters believed the government had not done enough to tame inflation.

The Reserve Bank of India (RBI) had said last year that its comfort zone for inflation was between 5 percent and 6 percent.

Finance Minister Pranab Mukherjee said on Monday he expected inflation at 7 percent by the end of the fiscal year, the latest in predictions from policy makers that have mostly missed the mark.

Annual food inflation in January was 13 percent and it was in double digits for most of 2010.

In December 2009, even before the current spurt in global food prices, Indian food inflation was 21 percent.

I think inflation even in FY12 will average around 8 percent going by the current trend. The real concern now is the sustained upward pressures in the non-food prices also, said Rupa Rege Nitsure, chief economist at the Bank of Baroda in Mumbai.

High credit growth of around 23 percent has also contributed to inflation.

Industrial output growth slumped to a 20-month low in December.

While some blamed a high statistical base effect for the weak result, the data added to fears that inflation mixed with high interest rates and global uncertainty could lead to a slowdown.

Adding strains to the economy, the current account deficit is projected at 3 percent of GDP in the fiscal year to the end of March, a pace some policy advisers say is unsustainable.

The RBI last raised interest rates in January. It also increased its projection for inflation at the end of March to 7 percent from 5.5 percent, an indication that it will continue to tighten monetary policy.

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