In October, growth in IIP had declined by almost half to a three-month low of 2.2 per cent, despite it being a festival month, from 4.1 per cent the previous month. This was seen as an indication that the restocking after the goods and services tax (GST) roll-out had not given a boost to IIP.
A high rate of inflation in November seemed to have justified the Reserve Bank of India's (RBI’s) stance of a status quo in its monetary policy review earlier last month. Retail inflation breached the central bank's medium-term target for the second straight month in December which could intensify pressure for RBI to raise policy rates in the next few months. RBI had projected inflation to be in the range of 4.3-4.7 per cent in the second half of the year. The RBI holds its next policy review on Feb. 7
Analysts polled by Reuters had predicted December's consumer inflation rate would climb to 5.10 percent, the highest since July 2016, from 4.88 percent in November.
RBI, which has a medium-term inflation target of 4 per cent, has raised its inflation estimate to 4.3-4.7 percent for the six months through March. But some analysts feel inflation could overshoot its estimates.
Sunil Sinha, principal economist at India Ratings, said the RBI was unlikely to change its policy stance soon.
"If the inflation pressure continues beyond this level, one can expect the central bank to change its policy stance to hawkish," he said.
Rising inflation amid firm global crude oil prices is a major worry for Prime Minister Narendra Modi ahead of his last full-year budget, due on Feb. 1, as he hopes to win a second term in 2019.
Analysts said any sharp rise in state spending in the budget
that fuels inflation could force the central bank to raise rates earlier than expected.
The U.S. central bank is forecasting three rate hikes for 2018. It raised rates three times last year.
While the world's seventh largest economy
is expected to grow at 6.5 percent in the current fiscal year ending in March, a continued rise in inflation from 1.46 percent in June, the lowest on record since 2012, has alarmed policymakers in New Delhi.
Crude prices have rallied, sending Brent crude above $70 a barrel on Thursday for the first time since December 2014, a worry that India imports most of its energy needs.
Despite a cut in taxes, retail petrol prices have risen 5.6 percent and diesel by 9 percent since June in the Indian capital.