Retail inflation for December, data for which was also released, offered some relief to policymakers, with price levels easing to a 15-month low of 4.59 per cent on account of a dip in food inflation. While retail inflation for December came down to within the Reserve Bank of India's (RBI's) medium-term inflation target after eight months, industrial production in November contracted after two months of expansion.
Factory output had grown by 2.1 per cent in November 2019.
Among the sectors, manufacturing output - with a weight of 77.6 per cent in the IIP - contracted 1.7 per cent year-on-year in November after growing 4.1 per cent in the previous month.
Vegetable prices fell 10.41 per cent from a year ago in December, while cereals were up only 0.98 per cent, the data showed.
The IIP data comes as a dampener to hopes of an economic revival, as factory output in the country had grown 3.6% in October, the highest since a countrywide lockdown was imposed due to the coronavirus lockdown in March a year ago.
Cereal and other products saw marginal rise in price during December a year ago at 0.98 per cent. Inflation in meat and fish, and egg segments stood at 15.21 per cent and 16.08 per cent, respectively.
Though experts were expecting a fall in inflation in the last month of 2020, the actual extent was more than expected. Oil and fats prices grew 20.05 per cent during the month.
Data released by the National Statistical Office on Tuesday showed the Index of Industrial Production (IIP) declined by 1.9% in November as manufacturing (-1.7%) and mining (-7.3%) contracted.
"With lead indicators such as electricity demand, exports, and GST e-way bill generation displaying a rebound in activity in December 2020, we anticipate a pickup in the IIP back to a growth of 2-4 percent in that month", Nayar said. "Additionally, a broad based domestic and global economic recovery should improve aggregate demand, posing upside risk to inflation", said Rupen Rajguru, Head - Equity Investments and Strategy, Julius Baer India.
The decline in food inflation was brought about by a favourable base effect in vegetables.
Despite high inflation rates, the central bank had defended the inflation target of 4 per cent for India.
RBI closely observes retail inflation figures to determine key policy rates.
Interestingly, core inflation, which measures growth in the consumer price index after removing the food and fuel components, is not moderating, and remained in the range of 5.6-5.8 per cent in the second half of 2020.