RBI warns of high prices, low growth at 8% ahead

The Reserve Bank of India (RBI) today warned of difficult days ahead, saying inflation will remain at elevated levels for some more time while the economic growth rate will moderate in the current fiscal.

"The Indian economy needs to brace up for a difficult year from a macroeconomic perspective. With weak supply response, inflation remains an important macroeconomic challenge," RBI said in its Annual Report for 2010-11.

It said that growth is likely to remain at 8% in 2011-12, lower than 8.5% clocked in the previous fiscal. RBI said if the global financial condition deteriorates, it could further lower the growth projections in the current fiscal.

"Growth prospects for the year 2011-12 seem to be relatively subdued compared to the previous year due to a number of unfavourable developments. Global uncertainties have increased," the report said.

It said that persistent inflationary pressure, rising input cost, rise in cost of capital due to monetary tightening and slow project execution are some of the factors which could put pressure on growth.

The overall inflation in June stood at 9.22%. "Inflation is likely to remain high and moderate only towards latter part of the year to about 7% by March 2012," RBI said.

Besides, high food and non-food commodity price inflation pose risk to growth, the central bank said.

The global oil and commodity prices, even after some correction, remain high and could adversely impact growth.

Persistent inflationary pressures, rising input costs, rise in cost of capital due to monetary tightening and slow project execution are some of the factors that are weighing on growth, it said.

To sustain high growth in medium term, it was important to shore up investment, RBI said, but added that the scope for stimulus was limited. "Fiscal and monetary space is limited for any counter cyclical stimulus if global conditions deteriorate."