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 positive in March and edged higher in April to 2.1%, an 18-month peak. Inflation will drift upwards in the months ahead, driven by higher food and fuel prices, stronger domestic demand (spurred by tax cuts and lower interest rates) and the gradual depreciation of the rupee, which will push up import costs. Pent-up liquidity in the public and banking sectors could translate into additional demand-side pressure, and we expect year-on-year inflation to approach 5% by December 2011. However, monetary and fiscal discipline and conservative bank lending will help to contain the pressures, and we expect average inflation to remain comparatively subdued, at about 2.8%, in 2011. Inflation will accelerate to 3.1% in 2012, despite lower global commodity prices, supported by robust domestic demand and the introduction of VAT in mid-2012.