In a big relief to the government, headline inflation has dropped to a five-month low on the back of a softening in vegetable prices. Food prices rose 13.68 per cent year-on-year last month, much slower than an annual rise of 19.93 per cent in November.
Onion prices fell 42 per cent month-on-month, while overall vegetable prices fell nearly 30 per cent as compared to November.
Wholesale price inflation eased to 6.16 per cent in December from a 14-month high of 7.52 per cent in November, government data showed. Economists polled by Reuters had expected inflation to ease to 7 per cent.
The sharp fall in food prices had a similar impact on retail inflation, which cooled to a three-month low of 9.87 per cent in December.
Controlling high prices has been the biggest priority for the government, which faces general elections by May 2014. The Congress Party had blamed high food prices for the poll debacle it suffered in state elections held in December.
The sharp fall in inflation led to a rally in stock markets. The BSE Sensex surged over 250 points, while the broader Nifty traded above the key 6,300 levels. Analysts said chances of a rate hike later this month are unlikely.
"This data, in conjunction with what we saw in CPI, does indicate the RBI would continue with the previous meeting -- which is watching and waiting for more data. We believe a rate hike may not come in this meeting," Shubhada Rao of Yes Bank said.
However, a respite from high interest rates is unlikely because despite a sharp decline in prices, inflation continues to be above the Reserve Bank's comfort level.
"I don't expect any rate cuts to begin in the near future... There is also potential upside risks to inflation coming from global commodity prices," Rupa Rege Nitsure of Bank of Baroda said.
The reading for October headline inflation was revised to 7.24 per cent from 7.0 per cent.
(With inputs from Reuters)
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