The Reserve Bank today 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.

"Should these trends continue, they will impact inflation, domestically and globally," the RBI said.

Pointing to demand-side pressures, India's central bank said that this risk arises from the spill-over of rising food inflation, rising input costs and pressure on wages.

The rising input costs relate particularly to industrial raw materials and oil while pressure on wages are to both the formal and informal sectors.

As thr rise in food inflation has been persistent for more than two-years now and rather sharp in recent times, "this cannot but have some spill-over effects on generalised inflation," the apex bank observed.

This would be particularly so as the growth momentum is strong and both workers and producers are likely to have pricing power, it said.

In the corporate sector, the share of wages in total costs is increasing and the indexation of the Mahatma Gandhi National Rural Employment Guarantee Act would also raise the wage rate in the agricultural sector, it said.

In addition, besides oil, prices of some primary non-food articles have also risen sharply in the recent period.

"Since these are inputs into manufactured products, the risk to headline inflation is not only from the increase in non-food items but also because the increase in input costs will ultimately impact output prices, the RBI said.

As the output gap closes, corporates will also be able to sustain higher output prices.

"In the absence of commensurate increase in capacity, there is the risk of demand-side pressures accentuating," the RBI said.

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RBI sees economic growth moderating in 2011-12

The Reserve Bank today said India's economic growth rate will moderate in the next financial year, even as it retained the forecast for the current fiscal at 8.5 per cent with an upward bias.

"Looking beyond 2010-11, the Reserve Bank expects domestic growth momentum to stabilise, though the GDP growth rate may decline somewhat, as agriculture reverts to its trend (assuming a normal monsoon)," the central bank said in its third quarter review of monetary policy.

As regards inflation, the RBI said that it would ease in the first quarter of the next fiscal (2011-12) but added that several upside risks are already visible in the global environment and more may surface domestically.

For the current fiscal, it projected 7 per cent inflation by March-end. The 1.5 per cent upward revision in inflation projection is based on high global commodity prices and demand-supply imbalances.

The RBI's projection of India's GDP growth rate stabilisation comes amidst talks of double-digit growth to match China's economic growth rate of 10.3 per cent in June quarter.

The Reserve Bank of India (RBI) retained the GDP growth projection for this year at 8.5 per cent.

"...the baseline projection of real GDP growth is retained at 8.5 per cent as set out in the Second Quarter Review of Monetary Policy of July 2010 but with an upside bias," it said.

The central bank expressed satisfaction that Indian economy has bounced back to its pre-crisis growth trajectory, at 8.9 per cent in the first half of 2010-11, powered by domestic factors, including good agricultural growth and rising exports.

It expects the country's growth momentum to persist in the coming years, on the back of robust corporate sales and healthy tax collections, along with a booming service sector.

"Overall, robust corporate sales, large indirect tax collections, advance tax payments and leading indicators of service sector activity suggest persistence of the growth momentum," it said.