Analysts polled by Reuters had forecast December's CPI inflation to rise to 5.10 per cent from November's 4.88 per cent.
Commenting on India's retail inflation, which grew at 5.2 percent in December, Credit rating agency ICRA on Friday said that the extent of the uptick in IIP growth in November 2017 was far sharper than expected.
The energy index fell 1.3% in December after a 3.9% rise in November. 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. Eggs, vegetables and fruits became costlier, while inflation moderated for cereals and pulses.
Weak import and producer price reports this week had raised concerns about the inflation outlook, although the two reports did not have a strong correlation with the CPI data. That lowered the year-on-year increase in the CPI to 2.1 percent from 2.2 percent in November.
Forecasters also saw signs of inflation picking up after the Labor Department reported stronger-than-expected growth last month in so-called core prices, which exclude the often-volatile categories of food and energy. Growth in the manufacturing component of the index touched 10.2% in November, up from 2.47% in the previous month. The December increase was driven by a 2.7% decline in gasoline prices.
"We've been seeing stronger gains in core inflation, and I think there are good reasons to expect core inflation will be stronger this year as well", said Michael Pearce, senior USA economist at Capital Economics.
The cost of medical care increased 0.3 percent, with prices for prescription medication surging 1.0 percent after rising 0.6 percent in November. Some central bank committee members have said that interest rates should be put on hold until inflation picks up.
But apparel prices fell for the fourth consecutive month, and airline fares fell 0.5 percent after a 2.4 percent drop in November. Retail sales rose 5.4 per cent from a year earlier.
The energy index rose 6.9 percent in 2017 after a 5.4-percent increase in 2016.
Sales last month included a 1.2 per cent jump in receipts at gardening and building material stores and a 0.2 per cent rise for auto dealerships.
The for final demand slipped 0.1 percent last month. The cost of healthcare services increased 0.2 percent last month after being unchanged in November.
Similarly, consumer non-durables' output rose by 23.1 per cent, and that of consumer durables by 2.5 per cent.