Indian inflation rose in August to 7.55 percent on a 12-month basis, official data showed on Friday, further reducing the chances of an interest rate cut from the central bank next week.
The Reserve Bank of India will meet in Mumbai next Monday to consider its interest rate policy, which will also be influenced by a 12 percent rise in the price of diesel ordered by the government that will push inflation higher.
The Wholesale Price Index rose to 7.55 percent from 6.87 percent in July, which was a near three-year low.
The diesel price hike, announced late Thursday, was hailed by some as a sign of intent by the government that it is prepared to tackle difficult economic reforms and the widening hole in the public accounts.
Others saw it as a move that will spur inflation at a time when the economy has slowed dramatically and needs a boost from lower benchmark interest rates, which stand at 8.0 percent.
Despite the rising inflation, India's Sensex index jumped 2.46 percent to close at 18,464.27 points after the US Federal Reserve said it would unleash a bond-buying programme aimed at kickstarting growth in the United States.
The Indian government action to hike diesel also boosted sentiment as it will help lower its subsidy payments and raises hope for further reform ahead of a cabinet meeting Friday when foreign direct investment is expected to be discussed.
"The US Fed action and fuel hike were structurally strong enough reasons to lift sentiment," said Jagannadham Thunuguntla, head of research with SMC Securities.
Ajay Bodke, head of investment strategy with Mumbai's Prabhudas Lilladher, said markets cheered the fuel hike as the government "was signalling that it was serious about fiscal consolidation and reforms."
Though political parties have lashed out at the government over the price hike, Bodke said there is a growing feeling that the government will not roll it back.
The central bank has kept rates on hold since April -- when it cut them for the first time in three years -- insisting inflation must recede and the government curb its ballooning spending.
But other central banks around the globe have been easing interest rates to revive their troubled economies.
India's Planning Commission deputy chairman Montek Singh Ahluwalia said he hoped that the RBI and rating agencies "would take into account" measures taken last night.
He said the move to cut diesel and cooking gas subsidies had created "substantial" fiscal space for the RBI to act to stimulate economic growth, Dow Jones newswires reported.