Retail inflation picking up due to surge in prices of essential commodities

Consumer inflation probably edged up for the fifth straight month in December, driven by higher food prices, complicating the central bank's task of steering monetary policy at a time of international deflation.

Retail inflation has been picking up since August, mainly due to a surge in prices of items like lentils and posing a challenge to Prime Minister Narendra Modi, whose party recently lost local elections in Gujarat.

The government has revised its economic growth target to 7 to 7.5 percent for the fiscal year that ends on March 31 from an earlier estimate of 8.1 to 8.5 percent, due to weak farm output and declining exports.

A drought in many parts of the country for the second year has hit production of rice, sugar, cotton and other crops, forcing the government to resort to imports to tame prices.

Consumer prices likely rose 5.6 percent in December from a year earlier, according to a poll by Reuters of economists, compared with November's 5.41 percent.

Industrial output, however, likely slowed to 2.3 percent in November compared with a year earlier and from a 9.8 percent rise in the previous month.

Both sets of data will released at around 1200 GMT on Tuesday.

Analysts said a plan to hike salaries of central government employees by nearly 23 percent and irregular rainfalls pose risks to the Reserve Bank of India's (RBI) target of capping retail inflation at 5 percent by March 2017.

"I expect the RBI will keep interest rates on hold in its next policy review," said N.R. Bhanumurthy, an economist at National Institute of Public Finance and Policy (NIPFP), a Delhi-based think tank.

The RBI is due to meet on Feb. 2 for its next monetary policy review. After easing interest rates aggressively last year, the RBI is likely to wait for cues from the budget and the depreciation of Chinese yuan on India's trade performance.

New Delhi fears a further depreciation of yuan could lead to flight of capital from emerging markets like India.

Finance Minister Arun Jaitley will present his 2016/17 budget at the end of February. Officials say he could raise the service tax to nearly 16 percent from 14.5 percent, further pushing up prices.

Bhanumurthy said retail inflation was likely to remain in the range of 5-6 percent for next few months though the rural distress would contain demand. "The RBI could wait and watch for some more time," he said.