Inflation jumped to a 41-month high of 7.41 per cent on Friday, seen as a deadly blow to the government and fanning expectations of more monetary tightening that would hit economic growth. Inflation has climbed steeply in Asia’s third largest economy from a trough of 3.1 per cent in October and is far above the central bank’s tolerance level of five per cent.

Terming soaring inflation rate as a global phenomenon, the government on Friday said it has no “magic wand” to bring it down immediately though it is taking and will take all possible steps to contain price rise. “Inflation is at a very high level in all emerging markets such as China (8.7 per cent), Russia (11.9 per cent), Argentina (7.3 per cent) and Turkey (8.1 per cent),” Kapil Sibal said.

Ruling out increase in subsidies, he said efforts were being made to contain prices through duty cuts and other measures. The poor people were supported through public distribution system, he added. India faces a daunting challenge of trying to keep food and other goods affordable for its population of more than 1.1 billion people, many of whom live in grinding poverty.

The data was worry reading for the Congress-led government, which owes its upset 2004 election win to support from India’s poor masses, hardest hit by inflation. Congress faces nearly a dozen state polls this year and general elections by May 2009. Indian political wisdom holds that when the price of onions goes up, politicians weep. “If the government fails to tackle inflation, it will pay the political price,” said D Raja, a leader of the Communist Party of India.

In response to the new data, economists saw more monetary tightening ahead with the RBI expected to hike the cash reserve ratio, the amount banks must hold as cash reserves, to curb liquidity. Tushar Poddar, economist at Goldman Sachs, said the rise in inflation suggests “the Reserve Bank of India could hike rates” which are already at six-year highs.

Some analysts forecast inflation rising to eight percent in coming months. The rate hikes have already dampened the economy by driving up loan costs. Economic growth is seen slowing to as low as seven percent in this fiscal year to March 2009 from around 8.8 percent last year.