Accepting high inflation as normal will be damaging: RBI

The Reserve Bank of India (RBI) warned on Thursday against accepting high inflation as the "new normal," adding that the outlook for the country's industrial sector remained uncertain amid high input costs and weak global conditions.

In its annual report for 2010/11, the Reserve Bank of India (RBI) added that despite the recent correction in global oil and commodity prices, inflation remained high and could hurt growth.

The RBI, which has raised interest rates 11 times since March 2010 but still faces inflation above 9%, said becoming resigned to high inflation could push up inflationary expectations in the long term and ultimately lead to a hard landing for Asia's third-largest economy.

The RBI expects inflation to remain high in the near term but start easing in the October-December period, although its inflation forecasts have consistently proven to be optimistic over the past year.

"As inflation starts going down and remains within a negative trajectory, which is what we are anticipating post-November-December, that changes the overall perspective on the growth-inflation balance," Subir Gokarn, the bank's deputy governor, said, commenting on the report.

While a US credit rating downgrade this month has raised global growth worries, RBI Governor Duvvuri Subbarao has warned that upside risks to India's inflation were more pressing concerns for the short term, and it was too soon to change the central bank's anti-inflationary policy stance.

Still, the RBI report said a further slowdown in global growth could put downward pressure on India's growth projection, which the RBI estimates at 8% for the fiscal year that ends in March.

"The outlook for the industrial sector in 2011/12 remains uncertain, with the downside risks outweighing the upside risks," the RBI said.

The Reserve Bank also said India needed to raise fuel prices further, to contain the burden of subsidies if global oil prices stay at current levels. India raised subsidised fuel prices in June for the first time in a year.

The RBI also said that though India had adequate foreign exchange reserves to handle external pressures, its current account deficit could be under pressure if the global economy weakens.

India's current account deficit improved to 2.6% in 2010/11 from 2.8% the previous year and is expected to be within 3% in the current fiscal year of 2011/12.