The sharp dip in the rupee currency along with higher foodprices drove annual inflation in the $59 billion economy to a 42-month high of 9.8 percent last month.

The rupee has depreciated 16.8 percent since November, making imported inflation a serious threat. The country imports most essential food commodities as well as fuel. Consumer goods accounted for 20 percent of last year's total $20 billion import bill.

"We haven't seen an improvement in (food) supply due to the continued drought," one analyst said on condition of anonymity. "The import prices are yet to factored in, though rupee has been more or less flat (in August)."

Food accounts for more than 40 percent of the basket of items used to compile inflation figures.

The government has reduced import taxes of selected essential goods since last month and the central bank has said supply shocks will taper off with expected monsoon rains next month.

Central Bank Governor Ajith Nivard Cabraal told Reuters last week that annual inflation in August is unlikely to hit double digits because of steps that have been taken by the government.

The International Monetary Fund in its latest staff assessment report (link.reuters.com/juw69s) has said that the current monetary policy stance is appropriate, and a tightening bias should be maintained in the near term until further evidence of diminishing inflation pressures and credit demand emerges.

The central bank in August kept its key policy rates unchanged after raising them twice since February to two-year highs, saying a spike in inflation was due to adverse weather conditions and the resulting disruptions to domestic food supplies.