New Delhi: Inflation is expected to remain above 7.0 per cent and shoot up to 7.9 per cent in third week of August, investment banker DSP Merrill Lynch has warned.

As against RBI (Reserve Bank of India) projection of 5-5.5 per cent average inflation during this fiscal, the merchant banker pegged the rise in price level at a higher 6-6.2 per cent.

"We believe inflation is likely to remain above 7.0 per cent throughout August and expect it to peak at 7.9 per cent in third week of August," DSP Merrill Lynch said in a report.

The merchant banker revised upwards its peak inflation projection to 7.9 per cent from its earlier estimate of 7.1 per cent.

The overall price level was expected to remain higher mainly due to rise in the fuel prices from August.

In the third week of August, it said fuel prices is to be higher by 12.2 per cent, while primary articles would be costlier by 7.8 per cent and manufacturing by 6.4 per cent.

Inflation will be average higher at 6.0 per cent in 2004-05 as against earlier estimation of 5.9 per cent.

However, it cautioned, "Rising oil prices remain the key risk and if oil companies raise fuel prices by 3-6 per cent over the next six months, average inflation could rise to 6.2 per cent."

Inflation at 7.51 per cent for the week ended July 24 came as a surprise for DSP Merrill Lynch, which it had estimated to be at 6.8 per cent.

"This was principally led by a spike in inflation of primary products, which rose to 6.4 per cent against our expectation of 4 per cent," it said.