Average consumer prices fell by -2.4% in 2010-after soaring in 2009-but will move back above zero during 2011. Year-on-year inflation turned negative again in January 2011, at -0.7% (after two months above zero), because of last year's high base level, but will turn positive in the months ahead (probably from March onwards), spurred by higher global food and fuel prices, stronger domestic demand (helped by tax cuts) and the gradual depreciation of the rupee (which will push up import prices). The introduction of VAT in mid-2012 will add to price pressures, while pent up liquidity in the public and banking sectors could see demand-side pressures increase. We therefore forecast that inflation will increase to 3.3% in 2011, before decreasing to 3% in 2012-the official ceiling-as external price pressures ease. That said, inflation will remain comparatively subdued, helped by monetary and fiscal discipline and conservative bank lending.