Retail inflation rose to about five-and-half year high of 7.35 per cent in December 2019, surpassing the RBI's comfort level, mainly due to spiralling prices of vegetables as onions were selling costlier.
The unexpected jump in inflation diminished the chances of the RBI cutting interest rate at its next monetary policy review due in early February.
As per the data released by National Statistical Office (NSO) on Monday, the spike in inflation in the vegetable segment was 60.5 per cent during the month compared to December 2018.
The overall retail inflation based on Consumer Price Index (CPI) was 2.11 per cent in December 2018 and 5.54 per cent in November 2019.
As per the NSO data, the overall food inflation rose to 14.12 per cent in December as against (-) 2.65 per cent in the same month of 2018. The food inflation was 10.01 per cent in November 2019.
The previous high in retail inflation was witnessed at 7.39 per cent in July 2014, the year Narendra Modi-led government assumed office for the first term.
The inflation in 'pulses and products' was recorded at 15.44 per cent, while in case of 'meat and fish' it was nearly 10 per cent.
The central government has mandated the Reserve Bank of India to keep inflation in the range of 4 per cent with a margin of 2 per cent on the either side.
The RBI, which mainly factors in the CPI based inflation, is scheduled to announce its next bi-monthly monetary policy on February 6. In its December policy, the central bank, which has been reducing rates, had kept the repo rate unchanged citing inflationary concerns.
Icra principal economist Aditi Nayar said the revision in rail fares, uptick in prices of some categories of automobiles and an unfavourable base effect may contribute to a further uptick in the core inflation to around 4 per cent in the ongoing month.
"Even though we expect the headline CPI inflation to correct sharply in January 2020 and further in February 2020, from the unpalatably high 7.35 per cent recorded in December 2019, it is expected to remain sticky above 4.3 per cent in the next few quarters," she said.
Moreover, the concerns surrounding a higher core inflation trajectory are likely to be adequate for the Monetary Policy Committee (MPC) to remain on hold in its February 2020 policy review, along with a possible change in stance from accommodative to neutral, she added.
With the CPI inflation breaching the RBI MPC's target of 6 per cent for the first time in the last 41 months, there is little scope for the committee to continue with monetary policy easing at least in the short term, M Govinda Rao, Chief Economic Advisor, Brickwork Ratings said.
Commenting on the latest number, industry body PHD Chamber said the rise in inflation rate is not sustainable and the average inflation should remain at around 5.5 per cent for the current financial year.
Going ahead, the chamber will look forward to the continuation of softer stance of monetary policy by the RBI to spur investments and consumption demand in the coming times.