A day before the Reserve Bank of India (RBI) is set to release its second quarter monetary policy statement, it raised the inflation forecast and trimmed the economic growth outlook for the current financial year.
The median projection for 2012-13 in RBI's Survey of Professional Forecasters has been lowered to 5.7 % for growth, while that for average wholesale price index (WPI) based inflation is revised upwards to 7.7 %. Earlier growth was seen at 6.5 % and WPI inflation at 7.3 %.
"Growth-inflation balance warrants careful policy calibration as growth slows but inflation risks persist," the central bank said in its second quarter review of macro-economic and monetary developments.
Inflation has remained sticky around 7.5 % so far in 2012-13 and persistent non-food manufactured product inflation, despite the growth slowdown, has emerged as a concern.
The contribution of individual commodities to the increase in non-food manufactured products' prices has been asymmetric. A few items like gold and ornaments, ammonium phosphate and grey cement have been contributing disproportionately to the inflation in non-food manufactured products' prices.
RBI cautioned that near-term inflation risks are on the upside but predicted moderation in prices from the fourth quarter of this financial year. "However, improved supply responses and moderation of wage inflation is vital for bringing down inflation to comfort level," it added.
On growth, RBI said there was a need to implement the recent policy reforms announced by the government to revive the economy.
"Economic indicators suggest that slowdown has continued in 2012-13. However, recent policy reforms should help in arresting the downturn. They may, on their successful implementation, support recovery later," the banking regulator said.
The potential growth rate of the Indian economy peaked around the middle of 2007-08 and has since continued its downward slide to around 7 %. "With negative output gap persisting, growth in 2012-13 is likely to fall short of the Reserve Bank's earlier projection," the central bank said.
Earlier today, finance minister P Chidambaram detailed a five-year road map for fiscal consolidation. He expressed hope that RBI will take cues from the government's steps and act on rates.
