Rising prices of milk and dairy products are a potential pressure point for food inflation, Citigroup said in a recent note.
Government data on wholesale price inflation pegs the annual jump in milk and dairy at 13.4 percent in December from 6-7 percent in the previous year and the 7 percent increase in milk prices last week could aggravate the situation further, it added.
"Amongst the worst affected dairy products is butter, where prices have doubled... all this is resulting in a knock-on impact across the food chain," Eonomists Rohini Malkani and Anushka Shah wrote in a note on Monday.
Accelerating food inflation, largely because of a poor harvest and rising global commodity prices, has become a major concern for the government, as about 42 percent of the Indian population lives on less than $1.25 a day.
Latest government data shows that the rate of food inflation rose to 17.56 percent in the 12 months to Jan. 23, higher than an annual rise of 17.40 percent in the previous week.
India is the world's largest milk producer but drought conditions, tighter feed and water availability have resulted only in a moderate growth in output whereas the demand has continued to rise due to shifting food patterns, Citi said.
Inflation data for January is due on Monday, a significant jump may trigger expectations of central bank policy action.
The central bank, which raised banks' cash reserve ratio by a higher-than-expected 75 basis points in its monetary review on January 29, lifted its wholesale price index <INWPI=ECI> inflation forecast for end-March to 8.5 percent from 6.5 percent.
It also said it expected inflation to moderate starting in July, assuming a normal monsoon and global oil prices holding at current levels.