The rise in the wholesale price index (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 revitalize 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.

India's 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.

India's repo rate of 8.00 percent is the highest central bank 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 liberalization program 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, India's 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)

• A Permanent Economic Emergency