The WPI data released by the government Monday show that inflation increased to 7.55 percent in August from 6.87 percent in July, contrary to analysts' expectations. Analysts polled by Reuters had expected an annual increase of 6.95 percent.
The data has come just ahead of the RBI monetary policy review meeting scheduled on Monday.
The headline inflation went up as non-food articles rose by 3.8 percent while food inflation marginally declined 0.38 percent from the previous month as the prices of fruits and vegetables dropped 4.5 percent and 4.7 percent respectively.
Build-up in inflation in this financial year so far is 3.48 percent, compared to 3.61 percent in the corresponding period of the previous year.
Data released by the Ministry of Commerce and Industry show that primary articles, which weigh 20.12 percent on the index, rose 0.1 percent to 219.5 points from the 218.8 points in the previous month. Major contributors to the inflation index in this group were the prices of caster seed, raw silk and gingelly seed that have increased 15 percent, 14 percent and 12 percent respectively.
The minerals index in the primary articles group declined 1.3 percent to 331.3 points from 335.8 in the previous month due to a fall in prices of sillimanite (13 percent), copper ore (9 percent), magnesite (7 percent) and crude petroleum prices (3 percent). However, the prices of phosphorite (23 percent) moved up.
The fuel and power group with 14.91 percent weightage on the index increased 3.1 percent to 181.0 from 175.5 in June due to the higher prices of electricity (agricultural 23 percent), electricity (industry 11 percent), and electricity (domestic 9 percent).
Under the manufactured products group, food products increased 3.0 percent, sugar 8 percent and oil cakes 6 percent.
The unexpected increase in the inflation index will prompt the RBI to leave the key interest rates untouched.
"Today's data shows underlying inflation pressure remains firm. Importantly, the core inflation has picked up which will remain a concern for the RBI," said Leif Eskesen, Chief Economist for India and Asean, HSBC, Singapore, Reuters reported.
Meanwhile, in an attempt to cut the subsidy bill on fuels, the Indian government has increased the diesel prices and fixed a cap on the subsidized LPG cylinders for domestic use. Some economists believe that these decisions indicate a positive change toward pro-reform actions from the government side and may prompt the RBI to cut rates.
"We have changed our rate cut expectations after the diesel price and LPG move and we still think RBI will cut rates in its September policy notwithstanding the high inflation number because the diesel price and LPG decisions are far more significant moves in the direction of fiscal consolidation," Gaurav Kapur, Economist, Royal Bank Of Scotland, told Reuters.
"Given that RBI is committed to reciprocate to steps on fiscal consolidation, and that they held back on rates for so long, I think they might cut rates by 25 basis points on Monday," he added.
The Indian markets retained its gains after the inflation data was out Thursday. The BSE Sensex gained 443.11 points or 2.46 percent to 18464.32 at the close and the NSE Nifty closed at 5577.65, up by 142.35 points or 2.62 percent.
The rupee continued to trade near two-and-half-month high at 54.70-54.71, versus its previous close of 55.43-55.44, on the back of the diesel price hike announced by the government and Federal Reserve's decision on new aggressive monetary stimulus.