Mumbai:  The Reserve Bank of India on Tuesday said inflation, which is showing signs of moderation, remains a concern in view of volatile crude prices in international markets and widening fiscal deficit.

Attributing the decline in food inflation mainly to seasonal factors, the Reserve Bank (RBI) said the impact of good vegetable output will remain limited in the absence of effective measures to address supply-side bottlenecks.

"...upside risks to inflation arise from global crude oil prices, the lingering impact of rupee depreciation and slippage in the fiscal deficit," the RBI said in its third quarter monetary policy review.
On food inflation, it said, "going by past trends, the extent of decline in vegetable prices seen in December... is usually observed in the winter season. As such, the decline in food inflation is likely to be limited in coming months".

There has been reduction in rabi acreage for pulses and it may have an adverse impact on prices, the RBI added.

Food inflation remained in the negative zone for three consecutive weeks. It was (-) 0.42 percent during the week ending January 7.

While the food prices are in the negative zone, the overall inflation was 7.5 percent in December.

The country's monetary authority said there is still a large element of suppressed inflation as domestic prices of some administered products do not reflect the underlying market conditions.

"This is particularly true of coal which had seen an increase towards the end of last year but no increase this year so far.... Further, the current levels of domestic prices of petroleum products do not reflect international prices," it added.

Moreover, slippage in the fiscal deficit has been adding to inflationary pressures and it continues to be a risk for inflation, it added.
The Central Bank said that in case crude prices spike due to supply constraints on account of geo-political factors it will have implications for domestic growth and inflation.

The RBI said exchange rate movements would also be an important factor in shaping the impact of global crude prices on domestic prices.

Rupee depreciated by about 13.2 percent against the US dollar between end-March 2011 and January 13, 2012.

The Central Bank, which has pegged the year-end inflation at 7 percent, said the revision in domestic- administered prices would add to inflationary pressures.