India Central Bank's Hands Tied as Inflation Rises More Than Expected

India's consumer price inflation rose more than expected in July, leaving no room for the central bank to cut benchmark interest rates amid the country's growth slowdown.

Consumer-price index rose 7.96% in July from a year earlier, compared with a revised 7.46% in June, according to India's Statistics Ministry. Economists expected an inflation rate of 7.4% for the month.

Food price index rose 9.36% in July from 8.05% in June. Core inflation also increased during the month.

Economists had been generally expecting inflation to remain at higher levels due to a steep rise in vegetable prices in July.

The deteriorating inflation outlook will effectively tie the hands of the Reserve Bank of India (RBI), according to economists.

The central bank is targeting to slow consumer-price inflation to below 8% in January 2015 and 6% the following year. While the nearest goal is "well within reach," there are upside risks to the longer-term target, RBI head Raghuram Rajan said earlier.

"The re-emergence in core inflation suggests that the balance of risks, as of now, to our projected path for inflation, have tilted slightly to the upside," said Devika Mehndiratta, economist at ANZ Bank.

"If the momentum in 'core' prices doesn't go back to the softer side, other things unchanged, this could push up our forecast inflation profile by 30 to 40bps such that the Jan 2015 print (point where RBI is targeting 8%) moves up to around 8.4%."

Meanwhile, weak monsoon in the country is projected to increase food prices further.

"As far as food is concerned, we expect some upward pressure in prices to continue because even though rainfalls have improved, sowing of some summer crops like cereals other than rice and oilseeds looks to have been adversely impacted by the later than usual start to the Monsoon," Mehndiratta said.