Analysts had predicted headline inflation at 2.7 percent and underlying inflation at 2.5 percent.

Monetary policy should hence remain expansionary, even if headline inflation is significantly above target, to support the recovery.

Going forward, we are likely to see a considerable slowdown in headline inflation.

Economists expect the rise in VAT in January back to 17.5% will temporarily push up headline inflation above the Bank's 2%.

While headline inflation has been persistently above target this contrasts with house price declines.

The further fall in headline inflation in June suggests that there is still little pressing need for an interest rate rise.

"And from a consumer's perspective, there's nothing good about a 4.7 percent increase in headline inflation in 12 months."

But now they could be facing an even more difficult problem - a commodity price shock which simultaneously raises headline inflation while also slowing the recovery from recession.

RBI has hiked interest rates 13 times since March 2010, to tame the headline inflation, which even now continues to be high.

Bullard has argued that the Fed should focus on headline inflation and de-emphasize core inflation, which has been a long-standing issue for the FOMC.