Finance minister Arun Jaitley said on Friday there was no cause to panic about the possibility of higher inflation, after a private forecasting agency said there was a 60 per cent chance India would face a drought this year.
Speaking less than a week before his first Budget speech to Parliament, Jaitley said the government was worried that global crude prices would rise because of violence in Iraq.
India imports nearly two-thirds of its oil requirements and subsidises some retail sales of fuel, making public finances and the current account especially sensitive to global prices.
"Right now it is not a panic situation," Jaitley said during a meeting with state governments to discuss ways to keep food prices down.
"Signs are that some people will try to take advantage of this situation. So the benchmark of good governance is to anticipate the problem," Jaitley said, indicating that hoarding by speculators was a problem.
Private forecasting agency Skymet revised its prediction on Friday to a 60 per cent chance of drought from its much lower previous forecast of 25 percent in April.
Rainfall in June, the first month of the four-month monsoon season, was the weakest in five years and the June-September rains will be below average, according to the India Meteorological Department. The weak start to this year's monsoon pushed the new government to take rapid steps including raids against hoarders to ease market concerns over possible supply shortages.
Soaring prices of basic goods such as milk and potatoes lifted retail food inflation in May to 9.4 per cent and there have been fears of worse to come with the delayed spread of the monsoon to the grain bowl region of northwest India.
India's other cause for concern - fighting in Iraq - has come as Iraqi troops battle to regain control of the north of the country from the al Qaeda splinter group the Islamic State in Iraq and the Levant (ISIL).
India is worried about the impact of Iraq crisis on crude oil, though there were indications of moderation in prices in the last few days, Jaitley said.