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Food prices for consumers also eased to an annual 11.06 percent in August from 11.24 per cent in July.
This increases expectations that RBI may cut rates later this month.
The rise in food inflation was on account of increase in prices of onions, vegetables, cereals and protein-based items.
The market breadth in BSE ended unhealthy with 1,475 shares declining and 649 shares advancing.
However, so far only 16 states have amended their Acts based on the model provided by the centre.
In its monetary and macroeconomic development report, RBI has raised hopes of a rate cut but also flagged some challenges.
Food inflation, as measured by Wholesale Price Index, stood at 10.60 per cent in the previous week.
Food prices rose 18.19 per cent year-on-year in October, slower than an annual rise of 18.4 per cent in September.
Fitch Ratings said with GDP growth of 6.5% and WPI-based inflation of 8.8%, India may have entered into a stagflation period in 2011-12.
The NSE Nifty too breached the 11,500-level with a jump of 145.30 points.
However, some experts also feel that there is a case for front-loading of interest rate cut to give a push to the economy
Though it eased slightly, prices of food items like rice, wheat pulses and potato showed a rise.
Declining price of vegetables pulled down inflation to over three-year low of 5.96 per cent in March, core inflation moderated to 3.5 per cent and food price inflation also eased to 8.2 per cent, which is likely to prompt the RBI to consider a rate cut in its annual monetary policy next month.
Inflation based on the Wholesale Price Index (WPI) stood at 6.84 per cent in February. In March, 2012, it was 7.69 per cent.
The WPI number follows retail inflation (CPI) data, which had slipped to a record low of 3.78 per cent in July.
Rajan has been facing continuous attacks by Bharatiya Janata Party MP Subramanian Swamy and some other sections, who have alleged that he has failed to lower interest rates and boost the economy
According to Morgan Stanley, high government deficit and strong growth in rural wages (which is growing at around 20 per cent year-on-year for last three years) are key factors keeping inflation expectations high.
Retail inflation measured by the consumer price index has risen sharply across food and non-food constituents, including services, keeping inflation expectations high, the Reserve Bank of India said in its Second Quarter Review of Monetary Policy 2013-14.
Inflation data for June has not brought any cheer to the markets. From this data, the possibility of a rate cut is negligible. Deficient monsoons and higher food prices would make any rate action difficult.
The benchmark indices ended higher on Tuesday, amid firm global cues, led by banks as lower inflation in July raised hopes of a rate cut by the central bank. Gains in index heavyweight Reliance Industries also boosted sentiment. The Sensex ended at 17,728, up 95 points and the 50-share Nifty jumped 32 points to close at 5,380.
The key short-term lending rate (repo rate)has been hiked by 0.25 pc to 7.50 pc.
With the average WPI-based inflation at 7.5% and CPI-based one above 10%, a bit of aggression is required to beat inflation. Four experts give their views.
Inflation moved up to 7.23 per cent in April on account of spurt in prices of vegetables, meat, milk and pulses, although onion and fruits showed a declining trend.
Soft crude prices will cut fuel subsidy bill and help contain fiscal slippage this year.
RBI Governor Raghuram Rajan is regarded as credible by global financiers.
In the mid-quarter review on December 18, the Reserve Bank left key policy rates unchanged but said it will hike interest rates if inflation does not subside.
The latest numbers are the lowest since December 2009 when headline inflation was at 7.15 per cent.
The common man will get no respite from rising prices for another six months, with the government on Wednesday saying that inflation, currently hovering above 9 per cent, will continue to remain high till December.
Overall, vegetables were 47.06 per cent cheaper during the week under review, from the same period last year.
Food inflation is back in double digits after a gap of a month-and-a-half and stood at 10.60 per cent for the week ending October 8 on the back of costlier vegetables, fruits, milk and protein-based items.
Inflation, as measured by the Wholesale Price Index, was 7.55 per cent in May. In June last year, it was 9.51 per cent.
Food inflation remained in the negative zone for the third straight week, at (-)0.42 per cent for the week ended January 7, mainly due to fall in prices of onion and vegetables.
Food prices fell for the second consecutive week as food inflation remained in the negative zone at (-)2.90 per cent for the week ended December 31, 2011.
After fighting inflation for more than two years, Reserve Bank of India (RBI) Governor Duvvuri Subbarao finally managed to bring it below the five per cent level - the tolerance level of the central bank - in FY14.
Food inflation fell sharply to a near four-year low of 1.81 per cent for the week ended December 10 as prices of essential items like vegetables, onion, potato and wheat declined.
Tata Motors was the top Sensex loser, down nearly 5%
Overall food inflation rose to 10.74 per cent in May, from 10.49 per cent in the previous month. Food articles have 14.3 per cent share in the WPI basket.
There are glaring anomalies with Indian data and that could lead to wrong policy prescriptions.
Eggs, meat and fish also became 13.36 per cent more expensive on an annual basis, while cereal prices were up 4.13 per cent.
During the week ended August 13, fruits became dearer by 27.01 per cent and eggs, meat and fish by 13.37 per cent on an annual basis.
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