The wholesale price index, India's most closely tracked inflation gauge, rose to an annualised 8.17 percent for the week ended August 21, from the previous week's level of 7.96 percent. It is the highest level since inflation touched 8.49 percent in mid-February 2001.

Fruit and vegetable prices were pushed up following weak monsoon rains in some key growing areas during the annual sowing season in July. Fuel prices also rose on the back of the strong spike in global oil prices.

"Inflation is picking up steam. It is touching more commodities. it will keep going up unless the government of India does something," said Saumitra Chaudhary, chief economic advisor at industrial ratings company ICRA.

He said the inflation rate was likely to remain over eight percent for at least the next five to six weeks.

"This is also a reflection of the continuous excess money supply in the economy. The central bank has not taken any steps to mop up the liquidity because it will push up interest rates," said D.H. Pai Panandikar, economist with the RPG industrial group.

He added that the bank was deliberately backing off from such a measure as it was bound to lead to hardening of interest rates.

"Interest rates are of great concern to the government because 55 percent of tax revenues go in interest payments. So they do not want any increase in interest rates," he said.