Mumbai: The rise in inflation rate to nearly 12 per cent in mid-July reflected the increase in fuel and raw material prices as well as strong consumer demand, the Reserve bank of India (RBI) said.

''Headline inflation firmed up further in major economies during the first quarter of 2008-09, reflecting the combined impact of higher food and fuel prices as well as strong demand conditions, especially in emerging markets,'' RBI said in its assessment of the Indian economy ahead of its policy review slated for tomorrow.

''Notwithstanding inflation remaining above the targets/comfort zones, the monetary policy responses during the quarter were mixed in view of growth implications of the persistence of financial market turmoil following the US sub-prime crisis,'' RBI said in its `Macroeconomic and Monetary Developments: First Quarter Review 2008-09.'

A near 10 per cent increase in state-set petroleum product prices had not kept pace with the rapid rise in global crude prices, it said, adding, supply side pressures on global food prices did not appear to be abating.

In its first quarter review of macro and monetary developments, the central bank said the Indian basket of crude rose by 122 per cent in rupee terms between February 2007 and June 2008.

The mineral oils index rose just 27 per cent in the same period, although freely priced items in the mineral oil group rose 15-104 per cent.

"This suggests that pass-through in case of administered petroleum products is still incomplete," it said.

Annual inflation was 11.89 in mid-July and has more than doubled since late February to its highest since the index was made available in 1995 after the government raised state-set fuel prices in June.

The RBI raised the lending rate by 75 basis points in June in two unscheduled moves to clamp down on inflation.

It also raised the cash reserve ratio for banks by 50 basis points to 8.75 per cent to absorb inflation-stoking surplus cash.

RBI said the government's finances could be pressured by increase in government salaries, a reduction in petroleum product duties, higher oil and fertiliser subsidies and compensating banks for waiving debts of small farmers.

The RBI expects the Indian economy to grow at 8.0-8.5 per cent in the current fiscal ending March 2009