The Reserve Bank on Monday said rising commodity prices poses the biggest threat to the country's growth and inflation in 2011-12 and warned that the subsidy regime currently in place for certain fuel products poses a risk to the economy.
Ahead of its annual credit policy, the apex bank said that the current political unrest in Middle East and North Africa (MENA) could also have significant impact on the country's oil imports.
"High global crude oil and other commodity prices pose the biggest risk to India's growth and inflation... Fresh pressures from commodity prices do make 2011-12 a challenging year for inflation management," the RBI said in its report on 'Macroeconomic and Monetary Developments 2010-11' released on the eve of its annual policy.
The country imports almost three-fourth of its annual oil and gas requirments, and a substantial portion of it comes from the MENA region. India's energy imports amounted to around USD 26 billion in 2009-10.
Recent political instability in Egypt and Tunisia, followed by the ongoing civil war in Libya, a major oil exporter and OPEC member, has pushed global crude prices to over USD 120 per barrel.
"The affected economies' share in India's trade is not large. However, oil constitutes about one-third of India's total imports," RBI said.
Commenting on the subsidy regime, RBI said: "Pass-through of global commodity prices, especially oil, has been as yet incomplete and constitute a significant medium-term risk".
While prices of some fuel products have been freed during recent years, the government still maintains a control over the prices of diesel and LPG.
The annual subsidy bill for fuel products is above $8 billion.
Many global banking firms and other experts had also earlier predicted that the government may have to take a decision on liberalising the prices to cut down on the subsidy bill. This would lead to a rise in retail prices and increase inflation.
It said in general, phases of high growth have generally been accompanied by low inflation.
However, high oil prices could pose a risk to growth prospects, moderating investment.
It, however, warned against the risks of inflation and said it is on the upside and "may remain elevated for some more time despite the current anti-inflationary bias in the monetary stance."