Protests over fuel price rises broke out across India yesterday, crippling transport routes in Calcutta and forcing businesses to close in software centres such as Hyderabad. In Delhi, police turned water cannons on protestors who broke through barricades at the parliament building.

Inflation data showing another big rise in the cost of living added to the woe of India's beleaguered Government. The wholesale rate of inflation leapt to an annual pace of 8.24 per cent, the fastest since August 2004 and up from 8.1percent the previous week.

Earlier this week, India became the latest Asian government to admit defeat in its fight to shield its people from rising oil prices when it raised petrol prices 11 per cent to stem huge losses, estimated £50 million a day, by the country's state-owned petrol companies. The price of diesel was raised by 9 per cent and cooking gas by 17 per cent.

Economists from Lehman Brothers, Standard Chartered and ICICI Securities said that they expect higher fuel costs to lift inflation in India to a 13-year high of 9.5per cent - nearly double the policymakers' 5percent comfort ceiling.

The Reserve Bank of India may have to raise interest rates although economic growth is moderating in the wake of a global slowdown, the analysts said.

The central bank has held rates at 7.75 per cent since March 2007, relying on forcing lenders to hold more capital in reserve to cool price rises. This week, however, it said that it was willing to use its “full range of instruments” to curb inflation.

ICICI, the Bombay broker, said in a note: “While the central bank has shown reluctance to touch policy rates, this may change soon. The bank will be worried about worsening inflation expectations on the back of this week's fuel price rises.”

Caps on petrol prices have already crumbled in countries such as Indonesia, which raised fuel prices by nearly a third last month, and Pakistan.

India's price rises will increase pressure on its coalition Government, led by the Congress Party, which has suffered local election defeats in the run-up to a general election that must be held by next May.

Manmohan Singh, the Prime Minister, said that the latest move was inevitable. He said: “Our oil companies cannot go on incurring losses. This way they will have no money to import crude oil.”

Times Recommends

• Lies and cover-up at MG Rover exposed by report
• High oil prices push manufacturing costs up
• Primark founder steps down as chief executive