The widely watched wholesale price index fell 1.55 per cent in the 12 months to June 27, compared with a 1.3 per cent fall of previous week and a market forecast of a 1.47 per cent fall.

The negative readings reflect a sharp acceleration in prices last year rather than deflation -- the WPI has been rising since March as price pressures build -- and had been expected by analysts and policy makers.

"Headline inflation continues to conceal the underlying inflationary pressures," said Gaurav Kapur, senior economist at ABN Amro Bank.

"The recent fuel price hike would add to these pressures and once the high base effect is out of the way, largely by mid-August, the headline WPI inflation will start reflecting a much more fair picture of inflationary situation in the economy."

The 5-year bond yield was unchanged at 6.34 per cent after the data release but rose 2 basis point by 0745 GMT, while the benchmark stock index recovered half a per cent but gave up gains and stood at 13,811 at 0852 GMT.

BORROWINGS, RATE VIEW

The central bank has cut its lending rate by 4.25 percentage points between October and April, while government has slashed duties and increased public spending to stimulate the economy hit by the global slump and falling domestic demand.

"Monetary measures related to liquidity management may remain subdued to accommodate large government borrowing," said Shubhada Rao, chief economist at Yes Bank.

On Monday, the government raised its fiscal deficit estimate to 6.8 per cent of gross domestic product in 2009/10, the biggest in 16 years, and planned record gross market borrowing of 4.51 trillion rupees ($93 billion), a quarter more than an initial estimate.

Despite the current negative readings, analysts said the WPI could end the 2009/10 (April/March) fiscal year at 4.5-5 per cent, above the central bank's estimate of 4 per cent.

The consumer price index, which assigns greater weightings to household items, rose an annual 8.63 per cent in May.

An increase in retail fuel prices, below-normal monsoon rains and subsequent worries of food supplies would keep the pressure on the overall price level.

"We have seen higher food prices exerting upward pressure on the overall index and to that extent monsoon remains a key wild card," said Gunjan Gulati, economist at JP Morgan Chase.