The Reserve Bank on Tuesday upped the inflation projection to 7 per cent by March-end, from the earlier estimated 5.5 per cent and warned against a possible spill over of high food and energy prices to a more generalised inflation.
Earlier, the apex bank had projected inflation at 5.5 per cent by March 2011 and the latest higher estimate is on account of high food, fuel prices high and persistent demand pressures building up in the economy.
The overall inflation for December shot up to 8.43 per cent on high prices of food items, from 7.48 per cent in November.
Food inflation remained in double digit through out December and was 15.52 per cent for the week ended January 8.
It had touched a high of 18.32 per cent in December 25.
"As high inflation persists, the prospect of it spilling over to the general inflation us rapidly becoming a reality," the RBI said, while announcing the third quarter monetary policy review here.
It said prices of some commodities rose sharply in the recent period even as global recovery was fragile. "Should these trends continue, they will impact inflation, domestically and globally."
Asserting that the current demand-supply mismatch for some commodities will persist, it said, "...The baseline projection for WPI inflation for March 2011 is revised upwards to 7 per cent from 5.5 per cent."
To cool inflation, the central bank today raised short-term lending (repo) rates and borrowing (reverse repo) rate by 0.25 per cent (25 basis points) each.
The RBI said the food inflation is likely to remain high in the near term because of demand-supply mismatches in several non-cereal food items like pulses, oilseeds, eggs, fish, meat and milk.
"While the impact of transitory factors is expected to wane, the price pressures on account of demand-supply imbalances in respect of some commodities will persist," it said.
It said the food inflation has been rising for over two years now and the increase has been sharp in the recent period. "This cannot but have some spill-over effects on generalised inflation...," it said.
The central bank said there can be an up to 9 basis points impact on WPI-inflation owing to fuel and aviation turbine fuel (ATF) price hike.
Earlier in January, the oil marketing companies had raised petrol prices by Rs Rs 2.50-Rs 2.54 per litre and ATF prices by about 2 per cent or Rs 948.5 per kilolitre.