By Manoj Kumar
NEW DELHI (Reuters) - India's annual consumer price inflation <INCPIY=ECI> accelerated to a near two-year high of 5.76 percent in May, driven by surging prices of food products such as pulses and sugar, which could dampen hopes of a rate cut at least during the next monetary policy review in August.
After leaving rates unchanged last week, Governor Raghuram Rajan said the Reserve Bank of India, which has targeted inflation at 5 percent by March 2017, was looking for room to reduce interest rates, but there were concerns over upward pressure on food and commodity prices.
- PHOTOS: New art and old relics at Mickey Mouse's NYC gallery 25 Pictures
- PHOTOS: See Yes on 3 supporters react to historic transgender rights Question 3 win 11 Pictures
Economists polled by Reuters had expected annual consumer prices, which the RBI closely tracks to set its interest rate policy, to be up by 5.52 percent in May, compared with an upwardly revised 5.47 percent in April.
Food inflation picked up to 7.55 percent in May from an upwardly revised 6.40 percent in the previous month, as prices of vegetables, sugar and pulses rose between 11 percent and 32 percent from a year earlier.
Retail inflation has more than halved since November 2013, thanks to a crash in global commodity prices as well as subdued rural demand. It had hit 7.03 percent in August 2014.
Analysts fear an increase in the cost of petrol and diesel by more than 5 percent since May 1, and in prices of foods such as sugar and milk in the last month, could further heat up prices.
"While there are some seasonal factors at play, structural mismatches are also evident in the rise in protein inflation," said A. Prasanna, economist at ICICI Securities Primary Dealership.
"We stick to our call of no more rate cuts in this financial year."
The government has also hiked taxes by 0.5 percentage point on services such as telecoms, travel and eating out from June 1.
Monday's data comes on the heels of a 0.8 percent contraction in industrial production <INIP=ECI> in April.
Asia's third largest economy grew 7.9 percent in the quarter to March, outpacing China's 6.7 percent growth, and is projected to expand by around 7.75 per cent in the current fiscal year that started on April 1.
New Delhi expects good rainfall between June and September, after two years of drought, to boost growth and tame prices of food items that account for nearly half of the consumer price index.
The monsoon, which delivers 70 percent of annual rainfall, is critical for India's 263 million farmers and crops such as rice, cane, corn and cotton because nearly half of farmland lacks irrigation.
(Additional reporting by Rajesh Kumar Singh, Neha Dasgupta in NEW DELHI, Abhirup Roy in Mumbai; Editing by Douglas Busvine and Kevin Liffey)