Subbarao said the current negative inflation, based on the official wholesale price index, largely reflects the statistical effect of the high base of last year. 'It should not be interpreted as structural deflation arising from demand contraction,' he said.

'Food price inflation continues to remain elevated,' he said. 'The uncertain monsoon outlook could further accentuate food price inflation.'

Reacting to the policy update, leading chambers like the Associated Chambers of Commerce and Industry (Assocham) said the measures announced Tuesday were on expected lines as no changes were expected in key rates.

'The policy raises the inflation target to 5 percent by March 2010, giving hope that stability in prices, especially of essential commodities and other articles, would return,' said Assocham president Sajjan Jindal.

A day ahead of the review, the central bank had sharply raised its growth forecast for the country's economy to 6.5 percent from its earlier projection of 5.7 percent, but warned inflation could also move into higher territory.

The bank also said food prices -- that are already high, particularly in the case of fruits, vegetables and lentils -- were likely to move northward given the feeble progress of monsoons and rise in minimum support price paid to farmers for their crops.

'There are indications of inflation firming up by the end of the year due to the waning base effect of last year, increase in commodity prices, delayed progress of monsoon potentially driving up food prices,' it said.

In parliament, opposition members in the Lok Sabha strongly protested what they called was gross inaction on the part of the government in curtaining the price rise that is putting even some basic items like fruits, vegetables and lentils out of the people's reach.