New Delhi: Wholesale price index (WPI)-based inflation unexpectedly slowed to 3.58% in December from 3.93% in the previous month because of a slower pace of growth in food prices.

Data released by the Central Statistics Office (CSO) on Friday showed inflation, measured by the Consumer Price Index (CPI), accelerated to a 17-month high of 5.21% in December from 4.88% a month ago.

This is the final set of data that finance minister Arun Jaitley will have before him as he sits down to finalize the Union budget for 2018-19, to be presented on 1 February.

Data released by the Department of Industrial Policy and Promotion (DIPP) on Monday showed wholesale food inflation decelerated to 4.72% in December from 6.06% a month ago, while fuel inflation accelerated to 9.16% against 8.82% during the same period. Inflation for manufactured items remained the same at 2.61% in both November and December.

The Reserve Bank of India (RBI) maintained a neutral stance in its December monetary policy review, citing the risk of rising inflation. It also marginally increased its retail inflation range for the second half of the current fiscal to 4.3-4.7% from 4.2-4.6% projected in October on account of rising global crude oil prices and implementation of the housing rent allowance (HRA) for central government employees recommended by the Seventh Pay Commission.

“The impact of HRA by the central government is expected to peak in December. The staggered impact of HRA increases by various state governments may push up housing inflation further in 2018, with attendant second order effects. The recent rise in international crude oil prices may sustain, especially on account of the Opec’s decision to maintain production cuts through next year. In such a scenario, any adverse supply shock due to geopolitical developments could push up prices even further," the RBI policy statement added.

Aditi Nayar, principal economist at ICRA Ltd, said the divergence in the sequential trend in the CPI and WPI inflation in December was driven by food inflation, and the impact of the higher housing inflation, which was limited to CPI. “The dip in the inflation for primary food articles in the WPI for December 2017 may signal some correction in the CPI inflation for food items in the ongoing month," she added.

Radhika Rao, India economist, DBS Bank, said firm inflation at a time when growth is showing early signs of a revival and fiscal slippage risks are on the rise, puts the RBI in a tight spot. “The upcoming February policy review is likely to see the RBI raise its FY18 inflation forecasts and lower the growth projection, currently at 6.7%. We expect the benchmark repo rate to be held unchanged at 6% next month," she added.

CSO on 5 January projected economic growth to decelerate to 6.5% in 2017-18 from 7.1% last year. Growth will accelerate to 7% in the second half of the year (October-March) from 6% in the first half (April-September), CSO said.

The economy has been hurt by the lingering impact of the invalidation of high-value banknotes in November 2016 and disruptions caused by the goods and services tax, introduced on 1 July 2017.

The Index of Industrial Production (IIP) rose to 8.4% in November from 2% in October, confirming that an economic recovery is underway amid rising price risks.

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