India's headline inflation accelerated to 10.16 per cent in May, raising the possibility of the Reserve Bank of India (RBI) hiking rates even before a scheduled policy review on July 27.
The wholesale price index rose an annual 10.16 per cent in May, driven by higher food and fuel prices, government data showed on Monday. The median forecast in a Reuters poll was for an increase of 9.56 per cent. Inflation in April was 9.59 per cent.
The data came on the heels of April manufacturing production matching its fastest pace in at least 15 years, the latest sign of strong growth in Asia's third largest economy and of rising inflationary pressures.
With inflation over its perceived comfort zone of 5 per cent for seven months running, the RBI has described the inflationary situation as "worrisome" and has left open the option of hiking rates ahead of its policy review.
But tight market liquidity from payments for 3G mobile spectrum purchases ahead of advance tax payments and worries over Europe's debt crisis could hold back the central bank from aggressive policy action, some analysts feel.
A majority of economists polled by Reuters expect the RBI leaving rates steady ahead of its quarterly review on July 27, but almost all see rate hikes in the policy review.
The 10-year benchmark bond yield rose 3 basis points after the data.
Monday's data showed manufacturing inflation, which the central bank has said is key to its decision making, rise an annual 6.41 per cent, compared with 6.70 per cent in April.
The food price index rose 16.49 per cent, while fuel prices were up 13.05 per cent.
Policymakers expect inflation to ease on better prospects for crops from good monsoon rains. But a hike in fuel prices, which is being discussed by the government, could push it up, an adviser has said.
Softening inflation is crucial for the government to push through keenly awaited reforms to free up retail fuel prices, because any move that further increases prices would spark off voter and political protests.
The wholesale price index is more closely watched than the consumer price index in India because it covers a higher number of products.