Soaring food prices drive headline inflation to six-month high

By Rajesh Kumar Singh

NEW DELHI (Reuters) - India's headline inflation hit a six-month high in August, driven by a surprise surge in food prices, hardening the case for Reserve Bank of India (RBI) governor Raghuram Rajan to keep interest rates high at his first policy meeting later this week.

Food inflation accelerated to a three-year high of 18.18 percent in August, government data released on Monday showed, driving overall inflation to a higher-than-expected 6.1 percent.

Recent government moves to increase fuel prices also spurred the jump in the Wholesale Price Index.

Economists polled by Reuters had expected a headline reading of 5.80 percent, compared with 5.79 percent in July.

Late planting and disruptions in supplies of vegetables and onions due to heavy summer rains have fueled food inflation. Onion prices jumped 51 percent between July and August.

Monday's data is the last major data point before former IMF chief economist Raghuram Rajan, who famously predicted the global financial crisis, holds his first policy meeting on Friday.

"Developments in the currency market suggest that RBI should be in a position to start reversing its tightening measures, however, they have to be careful as market could interpret it as tolerating higher inflation," said A. Prasanna, economist with ICICI Securities Primary Dealership in Mumbai.

The higher inflation number dampened market expectations that Rajan would begin to rollback some of the measures put in place by his predecessor in a bid to arrest a sharp fall in the rupee since May.

India's markets reacted badly to the inflation news, with stocks and the rupee trimming gains after the data was released, while bonds moved into negative territory.

By 12:13 p.m. (0643 GMT), the partially convertible rupee was trading at 62.78 per dollar compared with 62.50 before the data.

GRAPHIC: India CPI and WPI http://link.reuters.com/zar28t

NO SILVER BULLET

Rajan has already warned he does not have a "magic wand" to deal with India's economic crisis, but as he has been dubbed "The Guv" by a gushing Indian media, hopes are high he can find a formula to stabilise the rupee, calm inflationary pressure and at the same time spark a revival in economic growth.

Before he reveals his monetary stance, Rajan will have to first deal with the outcome of a pivotal meeting on Tuesday and Wednesday of the U.S. Federal Reserve.

The Fed is likely to announce measures to rein in its massive economic stimulus. Fears of an expected policy tapering have already sparked an emerging market sell-off, contributing to the rupee's fall to a record low.

The Fed is expected to reduce its $85 billion a month bond-buying programme, but financial markets are uncertain about the extent of the reduction.

(Additional reporting DELHI bureau and MUMBAI markets and treasury teams; Editing by Kim Coghill)