India's food and fuel prices quickened at the end of May, putting upside pressure on the wholesale price index that could prompt the need for monetary tightening by the central bank.
The food price index rose 16.74 per cent in the year to May 29, higher than the previous week's annual reading of 16.55 per cent, following a rise in fruits and potato prices, government data released on Thursday showed.
The fuel price index climbed 14.23 per cent, compared with an annual rise of 14.14 per cent in the previous week.
Food prices are likely to ease on the prospects of a normal June-September monsoon that is the main source of irrigation for farms in India.
But a possible increase in domestic fuel rates runs the risk of stoking inflation across sectors and could impact the government's target for headline inflation by December.
New Delhi wants to move away from state pricing of petrol and diesel, and allow the market to determine prices, which would help improve government finances.
Prime Minister Manmohan Singh's government has so far deferred the politically sensitive decision to free up fuel prices amid strong political opposition to subsidy cuts from a key coalition ally.
Wholesale prices, the most closely watched inflation gauge in India, rose 9.59 per cent in April from a year earlier, but Singh expects them to cool to 5-6 per cent by December.
An elevated headline inflation level would also put pressure on the Reserve Bank of India (RBI), which is looking to raise rates steadily, to take a more hawkish stance.
"A prolonged monetary tightening is needed and we believe that the Reserve Bank of India, so far, has been too slow in raising policy rates," Kevin Grice, senior international economist with Capital Economics in London, said in a research note on June 7.
The RBI has raised rates twice, by a total of 50 basis points, since mid-March to tame inflation and is expected to deliver another hike of 25 basis points when it reviews policy on July 27.
The markets have already priced in such a move.
The RBI has not ruled out any off-cycle policy action, but worries over Europe's debt crisis have dampened expectation of quick move.
Finance Minister Pranab Mukherjee said last Friday that India would not hold off further rate hikes.
A Reuters poll last month showed expectations for a cumulative 100 basis points of tightening in key interest rates by the end of March 2011.