Mumbai, Jan. 28: The Reserve Bank of India (RBI) today sounded a grim warning on inflation when it said that high food prices could spill over to cause generalised inflation in the economy.

The warning, which came in its Macroeconomic and Monetary Developments: Third Quarter Review 2009-10, has reinforced views that it could tighten the monetary policy tomorrow.

Analysts and bankers widely expect the central bank to raise the cash reserve ratio (CRR) by 25 to 50 basis points. The CRR is that portion of bank deposits that must be maintained with the RBI.

A few expect some changes in the reverse repo or the repo rate to control inflation. The repo is the rate at which the RBI provides funds to banks against government securities and reverse repo is that at which it absorbs liquidity.

In its report on the macro-economic and monetary conditions released today, the RBI said supply side pressures on a limited number of commodities led by food articles and the partial pass-through of the increase in global oil prices had conditioned the inflation momentum so far. But the risk of food inflation triggering inflationary expectations to cause generalised inflation remains a potential threat.

Inflation has become a source of worry both for the RBI and the government in recent times with the wholesale price index (WPI) inflation hitting 7.3 per cent in November and food price inflation ruling at 17.4 per cent. Over the last one year, potato prices have soared 57.56 per cent while pulses have become dearer by 46.87 per cent. The inflation for primary articles, which include food and non-food items, stands at 14.66 per cent.

The RBI is also worried about the rise in international crude prices since March last year in response to the expected global economic recovery and successive production cuts by the Organisation of Petroleum Exporting Countries. Metal prices have rebounded since April, led by copper, lead, zinc and nickel.

“Since the release of the second-quarter review in October 2009, inflationary pressures have further increased as manifested by the rise in both the WPI and CPI-based inflation,” the RBI said.

It pointed out that though the current phase of inflation was driven by the rise in prices of a few commodities such as sugar, oil cakes, foodgrain, the contribution of these key drivers has come down in December from November, indicating early signs of inflation getting generalised. According to the RBI’s Professional Forecasters Survey in December 2009, the outlook for 2009-10 growth has been revised upwards from 6 per cent to 6.9 per cent.

In terms of contribution to the overall inflation by the major groups, primary articles group continues to drive the overall WPI inflation, besides the manufactured food products.

“The contribution of non-food manufactured products group, which waned during the declining phase of inflation, has also started to increase in recent months,” it noted.

Further, the contribution of the fuel group, which was significantly negative since January 2009, showed a reversal of trend in recent months and now contributes positively to the overall inflation.

However, there was some good news on the macro-economic front. The central bank said the upside prospects for further acceleration in growth in the near term derive support from several factors, including signs of revival in private demand, both consumption and investment, possibility of strong industrial recovery continuing, outlook for a better Rabi crop, export growth remaining positive, favourable capital market conditions and the general improvement in business sentiments.