Indian inflation will stay contained but slowing inflows of foreign capital and heavy borrowing by local companies will put upward pressure on interest rates, a central bank adviser said on Monday.

R.H. Patil, one of four external advisers on the Reserve Bank of India?s monetary policy committee, said foreign purchases of Indian stocks would slow as the market appeared to be peaking. He said the situation for the market ? which on Monday rose 2.7% to a new record high ? was ?precarious?.

Speaking at a Reuters India Summit, Patil said inflation would stay at or below 5 percent for the coming year. ?I don?t see much pressures on the inflation side,? said the adviser, who is also chairman of the Clearing Corporation of India.

?I don?t expect, even (in) the worst event, that to come anywhere near 5 percent,? Patil said, referring to annual wholesale price inflation currently about 4.5 percent. ?That will remain at this level at least for the next one year.?

Only last month, the Reserve Bank of India (RBI) raised interest rates, surprising many in the market. The central bank said the rate rise was a pre-emptive strike against inflation.

But Patil said India?s situation was different from that of the United States, where growing inflationary pressures have prompted a series of rate rises by the Federal Reserve. ?It?s the liquidity balance which is putting pressure on the interest rates. It?s not the inflation,? he said.

?The pressure on interest rates is because of two factors, one the inflows have come down and second is the demand for credit from the private sector has tremendously increased, almost 50 percent during last year.?

The advisers do not have voting rights when the RBI sets interest rates. But financial markets scrutinize their comments for clues as to which way the central bank is leaning.

Asked whether Indian interest rates would rise if credit demand remained so high, Patil said: ?I think they will automatically rise because banks themselves will find that they have no money to lend.? If foreign direct investment flows picked up, that would alleviate such upward pressure on rates, he added.

Patil drew a distinction between the central bank?s reverse repo rate, used for draining liquidity, and its bank rate, used as a benchmark by government-run banks for longer-term loans.

The bank rate has stayed at a three-decade low of 6 percent even as the RBI has raised its reverse repo rate four times in the past 15 months, most recently boosting it a quarter percentage point to 5.5 percent.

?That is an instrument they would like to use for signaling long-term developments,? Patil said, referring to the bank rate. ?So they are also not very sure in the sense this liquidity situation will worsen in future.?

As property, equity and gold prices have all risen, the RBI has said it sees inflation as a risk to an economy that notched up growth of 8 percent in July-September from a year earlier.

Wholesale price inflation hit a three-year peak near 9 percent in 2004. It fell to around 3 percent last August but has since turned higher.

The central bank projects it will end the fiscal year on March 31 at 5.0-5.5 percent. Patil expressed doubt about how much more foreign institutional investment was likely for India.

The key BSE share index has risen more than 6 percent in 2006 after racking up a gain of 42 percent last year.

Foreign fund purchases since the start of the year have topped $1 billion after a record 10.7 billion dollars in 2005. ?I think the markets are at their peak,? he said. ?The P/E ratios are already sufficiently high. It?s a precarious market.?