an option for the RBI. It is a challenging task for the RBI and communicate it to the market.
"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."
* The partially convertible rupee trimmed gains to trade at 62.78 per dollar from 62.50 before the data.
* The benchmark 10-year bond yield was trading at 8.51 percent after the data from 8.43 percent.
* The main share index turned negative. It was trading 1 percent higher beforehand.
* The 1-year swap rate rose 8 bps to 9.22 percent, while the benchmark 5-Yr swap rate rose 4 bps to 8.35 percent, traders said.
Soaring food prices drive India's headline inflation to six-month high
(Reuters) - India's headline inflation hit a six-month high in August, driven by a surprise surge in food prices, hardening the case for central bank 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 liquidity 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