High global energy and raw material prices combined with a weak rupee fueled the fastest annual rise in India's wholesale prices in more than 30 years, raising expectations for the central bank to order more interest rate hikes.
A surge in crude oil and commodity prices since Russia invaded Ukraine in February has set inflation alight in many countries, forcing central banks to raise interest rates.
Wholesale prices (INWPI=ECI), akin to producer prices, climbed 15.88% in May from year ago levels, staying in double-digits for a 14th straight month, and was, according to economists, India's highest since September 1991.
A Reuters poll of analysts had forecast a rise of 15.10%.
The high rate was primarily due to rising prices for crude petroleum and natural gas, food items, basic metals and chemical products, the Ministry of Commerce and Industry said in a statement on Tuesday.
Prices for manufactured products, contributing around 64% to the wholesale price index (WPI), rose 10.11%, compared to 10.85% in the previous month, while fuel and power costs increased 40.62% from a year ago period.
On Monday, India reported retail prices had risen 7.04% in May from year ago levels, moderating slightly from the eight-year high of 7.79% posted in April.
The dismal reports for the two main measures of inflation led economists to expect the Reserve Bank of India (RBI) to raise key interest rates at its next policy meeting in August.
Aditi Nayar, economist at ICRA, the Indian arm of Moody's credit rating agency, said WPI inflation was likely to stay between 15%-16% in June, largely as a result of soaring global crude oil prices. And she predicted a response from the RBI.
"We continue to expect 60 basis points of repo hikes over the next two policy reviews," Nayar said.
The RBI's Monetary Policy Committee (MPC) raised its benchmark repo rate (INREPO=ECI) by 50 basis points to 4.90% last week, after a 40 basis points hike in April, while hinting at more rate hikes to come.
Food prices, contributing about a quarter of the WPI index, climbed 10.89% in May, though vegetable prices rose 18.26% in May year-on-year, compared to 23.24% in the previous month.
An uptick in wholesale food and energy prices is likely to feed into retail prices as the companies increasingly pass on high input costs to consumers.
Adam Hoyes, economist at Capital Economics Singapore said May's WPI figures suggested upside risk to consumer food inflation, which is politically sensitive in India.
"That will all be a cause for concern for the RBI, and suggests to us that the MPC will continue to frontload policy tightening with a 50 basis points hike in August."