Oil, food price rise to impact inflation outlook in 2011

Rising oil prices and firming up of global and domestic food prices are likely to have a significant impact on inflation outlook in 2011, a top RBI official said.

"High global energy, global commodities and domestic food prices are likely to have a significant impact on inflation outlook in 2011," the Reserve Bank of India Deputy Governor Subir Gokarn told reporters here today.

Global economic recovery, now starting to look somewhat more balanced and news of the US economy, more favourable than before, would contribute to pressure on commodity prices, Gokarn said.

The Reserve Bank is concerned the IMF estimate of an $10 increase in oil prices to $89 per barrel would have a significant impact globally.

The Food and Agriculture Organisation (FAO) has also sounded a warning a week ago that food prices worldwide may harden during 2011, intensifying global inflationary pressures.

"This is going to reinforce the already existing food price pressure we have in the domestic market," Gokarn said.

RBI Governor D Subbarao, had earlier said that inflation is clearly the dominant concern for the apex bank when it hiked its key short term rates--the repo and reverse repo rates-- by 0.25 per cent each to 6.5 per cent and 5.5 per cent, respectively, on January 25.

The (inflation) rate itself remains uncomfortably high (and) the reversal in the direction of inflation is striking, the RBI Deputy Governor said.

After some moderation between August and November, 2010, inflation rose again in December 2010 on the back of a sharp increase in prices of primary food articles and the recent spurt in global oil prices.

Non-food manufacturing inflation has remained sticky, reflecting both buoyant demand conditions and rising costs.

There is a pressure on protein and pulses, whose prices are still high despite the good monsoon, Gokarn said.

If the economy is growing at full capacity than the supply-side pressure translates into inflation, Gokarn said, adding that supply-side pressures are not directly addressed by monetary action.