India's inflation unexpectedly accelerated in April to over seven percent, data showed on Monday, sharply reducing the central bank's scope to cut interest rates to boost a stumbling economy.
The closely watched Wholesale Price Index jumped to 7.23 percent from the same month a year ago with food prices climbing by over 10 percent, the commerce ministry said. March inflation was 6.89 percent.
The disappointing numbers helped push India's currency to a record low close of 53.92 rupees to the dollar while the stock market shed half a percentage point to finish at a four-month trough of 16,215.84 points.
The inflation data was another reminder that Asia's third-largest economy is in trouble after figures last week showed industrial output shrank by a surprise 3.5 percent in March due to weak domestic demand and falling exports.
"Inflation is alive again. The central bank is staring at an economy posting below-trend growth and still-high inflation," said CLSA economist Rajeev Malik. "It is best not to expect much in terms of rate cuts."
The central bank in April started unwinding a string of aggressive rate hikes, cutting borrowing costs by a surprisingly large half-percentage point, as inflation edged down from 2011's near double-digit levels.
But with Monday's price numbers, the central bank's generous rate reduction looked premature, economists said, with India facing potential "stagflation" -- a dismal scenario of slowing growth and high inflation.
The central bank now has to decide whether to cut rates further to spur growth or wait and watch, economists said.
The central bank has "already given a big rate cut dose", Dharmakriti Joshi, chief economist at leading Indian ratings agency Crisil, told AFP.
"They'll hold on some time to see how inflationary pressures evolve and then take a decision on how they can support growth," he said.
Rising inflation is a major threat to the popularity of the Congress-led government, whose main supporters are India's hundreds of millions of poor, and which is already tainted by a stretch of corruption scandals.
Finance Minister Pranab Mukherjee isolated "food inflation as a matter of particular concern, especially as it has reached double-digits".
Foreign investors, meanwhile, are dismayed over India's ballooning trade and fiscal deficits and graft scandals that have stalled vital reforms needed to liberalise the still-inward looking economy and quicken growth.
The government estimates India's economy grew by 6.9 percent in the fiscal year to March 2012 -- the weakest clip since the 2008 global financial crisis -- and it expects expansion to be 7.6 percent this year.
But many economists expect this year's expansion to be much lower, in the six-to-seven percent range, a level judged by experts as insufficient to start significantly reducing India's poverty.
India's weakening performance comes as global investors look to Asia to revive the international economy with the eurozone debt crisis deepening.