NEW YORK WHOLESALE

Analysts on average had expected an annual rise of 7.60 percent, a Reuters poll showed. Wholesale prices rose 7.23 percent in April.

The annual reading for March was upwardly revised to 7.69 percent from 6.89 percent, the government said.

COMMENTARY

A PRASANNA, ICICI SECURITIES PRIMARY DEALERSHIP, MUMBAI

"Since core inflation is still below 5 percent, I would expect RBI to cut rates by 25 basis points as that is the key number. There are cost pressures on inflation from rupee depreciation, excise duty increases, but I don't think that will spill over to the demand side because the demand side pressure are quite weak evident from the manufacturing inflation."

BACKGROUND

- Standard & Poor's this week said that India could become the first of the so-called BRIC economies to lose its investment-grade status, less than two months after cutting its rating outlook for the country.

- The Reserve Bank of India is widely expected to lower its main lending rate by 25 basis points (bps) to 7.75 percent on June 18 when it reviews its policy for the first time after cutting rates by a sharper-than-expected 50 bps in April.

- Falling global oil prices as well as declining core inflation and growth in India give the central bank room to adjust interest rates, a deputy governor said last week.

- Industrial output rose just 0.1 percent in April, lower than expectations in a Reuters poll for a 1.7 percent increase. Output fell in March from a year earlier by 3.5 percent.

- The economy expanded 5.3 percent in the March quarter, its slowest pace in nine years, on a combination of mounting global uncertainties, muddled policies, high inflation and steep interest rates at home.

- Manufacturing sector kept up its steady expansion in May, driven by rising output, a business survey showed.

- Car sales rose just 2.8 percent in May from a year earlier as a hike in excise duty on the vehicles hit demand.

(Reporting by India treasury team; Editing by Ranjit Gangadharan)

The rise in the WPI from 7.23 percent in April came as both food and fuel prices picked up. It matched expectations in a Reuters poll.

The increase keeps inflation near its highest level this year - March data was revised up to a 2012 high of 7.69 percent - as policymakers come under pressure to revitalise an economy running at its lowest ebb in nine years and to steer the country away from a damaging ratings downgrade to junk status.

Still, traders said core inflation, which excludes volatile food and fuel prices, was around 5 percent, giving the Reserve Bank of India (RBI) room to cut its policy rate at a meeting on Monday.

"Since core inflation is still below 5 percent, I would expect RBI to cut rates by 25 basis points as that is the key number," said A. Prasanna, an economist at ICICI Securities Primary Dealership in Mumbai.

Economists calculate core inflation from the data.

Bond prices and stocks fell, while the rupee weakened after the data because it dashed earlier speculation that the headline figure would be below 7 percent.

The repo rate of 8.00 percent is the highest RBI policy rate among major economies in Asia. It cut the rate by 50 basis points in April as the growth outlook became more of a concern.

A political logjam in New Delhi and the euro zone debt crisis are weighing on Asia's third-largest economy. Capital inflows have slowed and the current account deficit widened.

Growth slumped to a nine-year low of 5.3 percent in the first quarter of calendar 2012 and data this week showed industrial output growth flatlined in April, triggering fresh calls for the government to restart an economic liberalisation programme stalled since 2004.

A Reuters poll after the GDP figures predicted the RBI will cut its repo rate by 25 bps to 7.75 percent on Monday to support growth.

"There is no room left for any fiscal stimulus, so to trigger growth, the RBI has to lower policy rates," said Rupa Rege Nitsure, chief economist at Bank of Baroda in Mumbai.

Still, central bankers face tough choices with inflation at relatively high levels.

Supply bottlenecks that stoke price pressures remain largely unattended, undermining the inflation fight. A fall in the rupee to a record low raises import price pressures.

Standard & Poor's this week threatened to downgrade the country's investment grade sovereign rating to junk, citing weakening economic fundamentals and policy inaction. It cut the outlook on its long-term rating on India to negative from stable in April.

(Editing by Frank Jack Daniel and Neil Fullick)