Core inflation rose to 5 percent year-on-year in December from 4.82 percent in November because of a less than expected drop in housing inflation.
Cheaper gasoline prices limited the increase in the overall CPI to 0.1 per cent in December after a 0.4 per cent rise in November.
Told to keep the inflation at 4 per cent, RBI, which has seen inflation rise beyond the comfort zone, will be under pressure to not slash the interest rate.
Indian consumer price inflation continued with its upward trend in December. They were previously reported to have increased 0.8 percent in November.
RBI expected inflation to range between 4.3 and 4.7% in Q3 and Q4 of this year, including the HRA effect of up to 35 basis points, with risks evenly balanced. This brought its year-over-year increase to 1.8 percent.
"The data is consistent with the view of the Fed on inflation, which is that weakness in growth before was due to transitory factors", said chief economist Lewis Alexander at Nomura Securities International, who had projected a 0.3 per cent monthly gain in core prices.More news: Huawei Mate 10 Pro Is Not Coming To US Carriers
For the full year, CPI rose 2.1%, the same as 2016, while core CPI slowed, posting a 1.8% increase after the 2.2% gain in the previous year.
Prices of medical care rose 0.3 percent, as the index for prescription drugs advanced 1 percent.
Economists were hoping that a tightening labour market, rising commodity prices and a weak dollar would lift inflation toward the Federal Reserve's 2% target in 2018. Including all items, the broader CPI showed a smaller gain in December in line with estimates, as energy prices declined, a Labor Department report showed Friday.
The US central bank has scheduled three rate rises this year and these latest figures have seen the pound reach its highest level against the dollar since the European Union referendum. The statistical impact of an unfavorable base also rose the year-on-year print.
Households also paid more for new motor vehicles, which rose 0.6 percent in price last month, the biggest gain since January.
Sales last month were supported by a 1.2 per cent jump in receipts at gardening and building material stores. The cost of healthcare services increased 0.2 percent last month after being unchanged in November. The consumer durables sector grew 2.5%, recovering from October's 6.89% contraction.
In terms of industries, 15 of the 23 industry groups in the manufacturing sector have shown positive growth during November 2017 as compared to the same month a year ago. The economy grew at a 3.2 percent pace during that period.