Fuel prices are significant contributor to inflation: RBI

He also said that fiscal deficit was a cause for concern. "Fiscal deficit is a cause of concern.

Fiscal situation needs to be consistent with economic scenario. We are exiting from a crisis management position to raising rates and by increasing liquidity," Gokarn said at a discussion on 'Global forces and domestic policy consideration - Indian perspective'.

Finance Minister Pranab Mukherjee had proposed in the Union Budget to bring down fiscal deficit to 4.6 per cent of GDP this fiscal from about 5 per cent in 2010-11.

On inflation, Gokarn said that fuel is now a significant contributor to inflation, adding that high energy prices will put pressure on the central bank's strategy of inflation management.

On steps to control it, Gokarn said the Budget outlined steps to bolster the output of protein sources, including lentils and milk would help to manage supply-side.

India's inflation decelerated slightly to 8.66 per cent in April from 9.04 per cent in the previous month, but remains above the RBI's comfort zone.

Gokarn said commodity prices will not go up sharply but are unlikely to see a steep fall, adding that food inflation is a great concern.

The rise in widely traded commodities like oilseeds and sugar have some implications on inflation, he said, adding that the commodities have become an asset class.

Gokarn also called the Government's articulation about the change in food consumption patterns to fruits and protein-rich food as a step in the right direction, as such items have been fuelling food inflation.

Gokarn said even though India's economic growth rate is reassuring, the slowdown in investment activity is not desirable.