Rise in commodity prices a major worry

Chief economic advisor Kaushik Basu on Tuesday said that inflation may gradually drop from the current level of 9.9 per cent, but it was too early to drop guard.

"I believe, it is a bit of a risky remark, that we have peaked in terms of inflation. March was probably the worst month in terms of inflation. There should be a slowing down. . . a slow slowing down from now onwards," Basu said at a forum organised by media house Jagran Group.

However, he cautioned that rising global prices of iron, steel and oil may put pressure on inflation and the situation should be addressed.

"There are international commodity prices which are rising -- iron, steel and oil -- which are sort of basic goods. So, there is some risk that these are going to feed into inflation, we have to be prepared to deal with it," Basu said.

RBI has projected inflation to come down to 5.5 per cent by end of this fiscal from 9.9 per cent in March, but also warned that volatile global commodity prices along with uncertain monsoon and demand pressures may jack it up.

Basu, however, did not elaborate what steps should be taken to address the issue of inflationary pressures from global commodity prices.

Global oil prices started rising again from March, 2010 and are hovering around $86 a barrel against around $70 in February. Similarly, iron ore prices climbed 80-90 per cent in Asian markets and 100 per cent in European markets in the first quarter of 2010. Also, world steel prices are firming up and have risen nine per cent in the last 12 months.

Basu also said that it was worrying that inflation, which was earlier concentrated in food items, has escalated a little bit into non-food products.

"So it is a more balanced inflation that you are seeing. So, it is going to other sectors," he said.

Food inflation moderated to 16.61 per cent in mid April, from over 20 per cent in December last year on arrival of rabi (winter) crops and reports of normal monsoon.

However, inflation has touched 9.9 per cent in March, way above RBI's projection of 8.5 per cent.