After peaking at over 16% in January 2010, the annual rate of consumer price inflation moderated to 9.3% in January 2011 in response to tighter monetary policy. Inflation averaged 12% year on year in 2010, up from 10.9% in 2009. It remains uncomfortably high, raising questions about the Indian economy's ability to grow by 8% or more a year without triggering an inflationary spiral. Given the prospect of higher global food and oil prices in 2011, we have revised up our forecast for consumer price inflation this year to 8.3%, from 7.4% previously. In 2012-15 consumer prices will rise by 5-6% a year, assuming the absence of shocks such as a sharper rise in global commodity prices than we currently expect or a failure of the monsoon in any given year. Another factor that could increase inflationary pressures is the deregulation of fuel prices. In June 2010, in an effort to bolster the public finances, the government decided to end state control of petrol and diesel prices. The relaxation of price controls is a crucial step towards reducing losses at India's public-sector oil companies and containing the government's rising contingent liabilities. Our benign outlook for global oil prices in 2012-15 suggests that the government will be able to eliminate fuel subsidies entirely during the forecast period. However, in the absence of a subsidy system, any surge in petroleum prices would quickly feed through to domestic fuel costs. It is therefore possible that the government could reimpose price controls in the event of another oil price shock.