The Reserve Bank of India (RBI) on Wednesday said the uncertainty surrounding global oil prices can have an adverse bearing on the inflation outlook though it will endeavour to bring it down to the target of 4 per cent by 2016-17.
However, the RBI can take comfort from the fact that inflation has declined at a faster pace than envisaged in the central bank's policy issued in January last year.
Going forward, RBI Governor Raghuram Rajan, in a statement issued on Wednesday, said, "The RBI will seek to bring inflation rate to the mid-point of the band of 4 per cent, (+/-) 2 per cent provided for in the agreement, i.e., to 4 per cent by the end of a two year period starting fiscal year 2016-17".
The RBI and the government had last month entered into an agreement to lower inflation to below 6 per cent by January 2016 and further to around 4 per cent by March next year.
The Consumer Price Index-based inflation rose to 5.11 per cent in January, from 4.28 per cent in December. This is well within the target of 8 per cent for January 2015, RBI said.
Referring to the firming up of crude oil prices in international markets, the RBI said, "The uncertainties surrounding any inflation projection are, however, not insignificant.
"Oil prices have firmed up in recent weeks, and significant further strengthening, perhaps as a result of unanticipated geo-political events, will alter the inflation outlook."
While the US benchmark West Texas Intermediate for April delivery gained 11 cents to $50.63 per barrel in morning trade, the Brent crude for April traded at $60.74 per barrel.
The other risk to inflation, RBI said, emanate from any possible spill over of volatility from international financial markets.
"The possible spill over of volatility from international financial markets through exchange rate and asset prices channels is also still a significant risk (on inflation)," the statement added.