India's stock market slumped today after the country joined fellow emerging markets giants Brazil, Russia and China in tightening monetary policy to combat surging levels of inflation.

Bombay's benchmark Sensex index appeared set to close at its lowest level in at least 10 months. In early deals it was down 450 points, at 14747.99. The decline was accompanied by a dip to two-month lows in other Asian stock markets as the rise in the oil price added to fears about inflation and higher interest rates.

The Sensex fall followed the first rise in interest rates from the Reserve Bank of India in 15 months. The central bank increased its repurchase rate to 8 per cent, from 7.75 per cent, after robust first quarter GDP figures cleared some of the gloom that has gathered over the health of the Indian economy in recent months. The move came seven weeks ahead of the bank's next scheduled policy meeting and a week after a 10 per cent hike in petrol, diesel and cooking gas prices triggered protests across India.

Robert Prior-Wandesforde, the HSBC economist, said: "Central banks across the region, and indeed across the world, are seeing rising inflation and one-by-one are being forced to adopt a more hawkish stance.

"Within Asia, the initial response of most policy authorities was to suggest that the increase in price pressures entirely reflected a temporary supply-driven commodity price shock, while weaker developed world growth would do the work for them in slowing economic growth and hence inflation. They are now waking up to the fact that both assumptions were at least partially wrong."

India's wholesale price index-based inflation rate stands at 8.24 per cent, its fastest pace in more than three and a half years. Economists expect wholesale inflation to hit a 13-year high of 9.5 per cent to be breached in coming weeks on the back of fuel price rises.

Tushar Poddar, the Goldman Sachs economist, said: "A tightening bias in monetary policy will continue in the near term. We expect the repo rate to increase by a further 25 basis points at the next policy meeting on July 29."

Goldman also expects Indian lenders to be ordered to keep more cash in reserve.

On the back of record oil prices and food shortages, inflation is battering consumers across South Asia – in Pakistan consumer prices rose at the fastest pace in at least 30 years last month, hitting 19.3 per cent. HSBC also expects Indonesia, Malaysia, the Philippines and Thailand to be forced into rate rises.

Price rises coupled with slower growth appear to have debunked the idea that the BRIC economies - Brazil, Russia, India and China - will remain insulated, or decoupled, from a US-led economic downturn.

Economic growth in India is set to approach 7 per cent this year, well down on the near-9 per cent average seen in the past three years, according to a recent report from the World Bank. In China, growth is forecast to fall to about 9.4 per cent from nearly 12 per cent last year. Brazil's expansion is set to fall to 4.6 per cent from 5.4 per cent, while Russia will slow to about 7 per cent from 8.1 per cent.

Brazil and Russia have both been forced to raise rates to combat price rises. China has ordered lenders to set aside more reserves.

Elsewhere in Asia, financial sector shares were particularly badly hit, with Sumitomo Mitsui Financial Group and National Australia Bank falling after reports that US investment bank Lehman Brothers may hunt for more capital after raising $6 billion (£3 billion) this week.

Investors were unnerved by a $5 a barrel rise in the oil price after the US announced lower reserves and fuelling worries of a global slowdown. Oil later eased 95 cents to $135.43 a barrel.

Higher energy and food prices have sparked double-digit inflation rates in some Asian countries, weighing heavily on equity markets.

Japan’s Nikkei share average fell to its lowest level in two weeks, down 2.1 per cent, or 294.88 points, to 13,888.60, with exporters the heaviest hit, such as camera maker Canon and consumer electronics giant Sony.

China’s benchmark Shanghai Composite Index also ended the morning down 98.30 points, or 3.25 per cent, at 2,925.94, after its consumer price index rose 7.7 per cent year-on-year in May.

The MSCI index of pan-Asian stocks dropped 2.3 per cent to the lowest level since April 2, while a separate index of Asia-Pacific equities excluding Japan was off 2.4 per cent to the lowest point since March 25.

From a record high on November 1, the MSCI Asia ex-Japan index is down around 24 per cent.

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