Inflation zoomed towards the double-digit mark at 9.89 per cent in February, the highest in 16 months, driven mainly by rising prices of essential food items and the hike in excise duty on fuel announced in the Budget.
The wholesale price-based inflation shot up 1.34 percentage points in February over 8.56 per cent in the previous month.
The figure has already surpassed the RBI's year-end projection of 8.5 per cent in January and "could cross the double-digit mark in March," said Chief Statistician Pronab Sen.
Finance Minister Pranab Mukherjee had earlier said the across-the-board hike in excise duty by 2 per cent in the Budget would push up the wholesale price-based inflation by only 0.41 per cent.
Among food items, prices of sugar, pulses and potatoes increased by 55 per cent, 36 per cent and 30 per cent, respectively during the year.
The fuel price index shot up by over 10 per cent, mainly on account of higher prices of petrol and diesel. While petrol became dearer by 11.73 per cent, diesel prices increased 8.85 per cent.
With inflation slowly spreading from food items to other areas, analysts say the RBI may tighten money supply further by raising interest rates in its April policy.
Already, some banks, including ICICI Bank, HDFC group, and the Bank of India have raised interest rates.
"To tame inflation, RBI could raise short-term lending and borrowing rates by 25 basis points each," Crisil principal economist D K Joshi said.
Partly withdrawing the stimulus given to the industry during the slowdown, Mukherjee raised the excise duty from 8 per cent to 10 per cent and increased customs duty on crude and excise duty on diesel and petrol in the Budget.
Inflation for food items was at 17.70 per cent in February, while for manufacturing it was 7.42 per cent. Sugar, prices rose 55.47 per cent on yearly basis.
"Inflation is primarily driven by food prices, but it is getting more and more generalised," Joshi said.
However, the government expects food inflation to cool down in the months ahead as it expects the rabi (winter) crop to be much better.
"The agriculture minister has said the prospects of rabi crop is good and that would definitely have a positive impact in containing inflation and bringing down the prices," Commerce and Industry Minister Anand Sharma said.
Rabi crops will start arriving in the market from April by when the overall inflation could rise to 11 per cent.
"Inflation is likely to be at 11 per cent mark by the end of March. I expect RBI to increase repo, reverse repo (short term lending, borrowing rates) and Cash Reserve Ratio by 25 basis points each," HDFC Bank economist Jyotinder Kaur said.
The final figures for inflation in January and February could be even higher, going by the prevailing trend. In December, inflation was revised to 8.10 per cent from provisional estimates of 7.31 per cent.
