Inflation in India continues to be within tolerable limits, despite the drought and higher fuel prices, but a major risk to current benign outlook may come from future movements in international oil prices.

The Reserve Bank of India report on currency and finance for 2001-02, released in Mumbai on Monday, said inflation remained benign during 2002-03 and factors like continuing weakness in global recovery, subdued global inflationary pressures, moderate recovery in investment demand, large buffer stocks and comfortable foreign exchange reserves contributed to the moderate inflation outlook during the year.

Inflation has touched a high of 5.56 per cent for week ended March 15 mainly due to price rise in manufactured products brought about by steep hike in domestic fuel prices.

The RBI report said despite the drought affecting kharif production substantially, the prices of food articles have risen only moderately. However, in post-kharif period, primary non-food articles inflation has gone up, which could have some indirect impact on manufacturing prices.

Inflationary pressures generally remained subdued across the globe during the year and international commodity prices recovered in second half of 2002.

Since early August 2002, spot oil prices have risen markedly owing to concerns about a further deterioration in geo-political situation in West Asia, it said.

"Thus, the major risk to current benign outlook for  inflation hinges upon prospects for uncertainty relating to the future movements in international oil prices", it added.

The RBI report notes that Indian economic policy took a new direction in July 1991. Over the decade or so since then, the reform process has encompassed all areas of the economy.

Wide ranging reforms were initiated and implemented in order to place the economy on a higher growth trajectory by inducting greater efficiency and competitiveness in all spheres of economic activity   Monetary policy reforms facilitated a significant reduction in pre-emption of resources.

A noteworthy development was lowering of inflation in the economy in second half of 1990s attributable inter alia to better monetary management, it added.

In the macroeconomic and financial spheres, inflation has been contained, external indicators have improved, exchange rate is flexible and the country is free of financial repression, it said.

The trade account was open and India has become much more integrated with the world economy, it added.