-Inflation rate has reached "very uncomfortable" levels and the Reserve Bank of India must act to curb it, a key economic adviser to the prime minister said Thursday, adding to expectations that the central bank may hike interest rates before its next policy meeting on July 27.

"It can no longer be treated as purely food inflation. The manufacturing sector is also showing a reasonably high degree of inflation. Therefore, some action on demand side (inflation) is called (for)," C. Rangarajan, chairman of the Prime Minister's Economic Advisory Council said at the sidelines of a banking conference.

"I think the question of taking some action in terms of tightening the policy has become imperative," said Mr. Rangarajan, also a former RBI governor.

The comments come even as speculation of an inter-meeting rate hike gathers momentum fuelled by strong economic growth as well as high inflation numbers.

The government may well be veering toward this view. Finance Minister Pranab Mukherjee said Monday he wasn't in favor of a rate hike for now, but later toned down his comments, saying he thinks the RBI will take appropriate steps when needed.

India's economic recovery has been strong, but has been accompanied by persistently high inflation. What started out as a food price driven inflation has now moved into non-food manufacturing items.

The wholesale price index rose 10.16% in May from a year earlier, surpassing 9.59% in the previous month. March inflation was revised to 11.04% from an earlier estimate of 9.90%.

A deputy governor of the RBI also said the central bank will put more emphasis on countering inflation than on concerns about any impact from euro-zone developments in its policy decisions.

"Double-digit inflation is not an easy thing," K.C. Chakrabarty, who doesn't handle monetary policy, said at the same event.

Mr. Rangarajan, however, said he thinks headline inflation will begin to ease by October-November, falling to around 6% by March 2011.

"I think food inflation will come down. There are two factors-- one is the arrival of the winter crop and the other is the monsoon."

In the week ended June 5, India's food articles index fell 1.1% from a week earlier to 293.2, data released Thursday showed.

Bonds, which had rallied in the morning session on an overnight buy back announcement from the central bank, fell sharply on the comments by Mr. Rangarajan, as traders priced in a growing probability of a near-term interest rate hike.