In its report on macroeconomic and monetary developments a day before the third quarterly review of its 2007-08 monetary policy, the apex bank said, “Since pass-through of higher international oil prices to domestic prices remains incomplete, inflation has remained suppressed. Elevated international food prices also pose potential inflationary pressures in the period ahead.”

Notwithstanding the underlying inflationary pressures, central banks in the US and other advanced economies have resorted to monetary easing in order to forestall the adverse impact of the tightening credit conditions on their broader economies. In the US, headline inflation firmed up to 4.1 per cent in December 2007 from 2.5 per cent a year earlier mainly due to higher food and energy prices.

In India, inflation based on the wholesale price index (WPI) has remained below 4 per cent since mid-August 2007, partly reflecting moderation in the prices of primary food articles and some manufactured products items as well as base effects.

RBI’s target is to contain inflation in close to 5 per cent in 2007-08, but increase in retail prices of major transport fuels could lead to price levels breaching the comfort levels.