The Reserve Bank of India on Friday warned that the risks to the 8 per cent GDP growth projection for 2011-12, made in its July review, are on the downside.
In its mid-quarter monetary policy review announced on Friday, the central bank has attributed the downside risk to the growth projection to weakening global demand and the slowing down of domestic demand, to which the monetary policy stance is also contributing.
Although India's exports have performed extremely well in the recent period, this trend is unlikely to be sustained in the face of weakening global demand.
GDP growth decelerated to 7.7 per cent in Q1 of 2011-12 from 7.8 per cent in the previous quarter and 8.8 per cent in the corresponding quarter a year ago. Agricultural growth has accelerated, but industry and services have decelerated, the RBI said.
According to the bank, inflation remains high, generalised and much above its comfort zone — of 4.0-4.5 per cent. The inflation reading for August was 9.78 per cent.
Pointing out that there is an element of ‘suppressed inflation', the RBI said though global oil prices have moderated, the pass-through to domestic prices remains incomplete.
Food inflation, which is at near-double digit levels despite normal monsoons, underlines the fact that it is being driven by structural demand-supply imbalances and cannot be dismissed as a temporary phenomenon, the central bank said.
The RBI is of the view that a premature change in its policy stance could harden inflationary expectations, thereby diluting the impact of past policy actions. It is, therefore, imperative to persist with the current anti-inflationary stance.
Market experts say the RBI may not pause in its interest rate hike cycle till it gets inflation within the comfort zone.
As monetary policy operates with a lag, the RBI observed that the cumulative impact of policy actions should now be increasingly felt in further moderation in demand and reversal of the inflation trajectory towards the later part of 2011-12.
The RBI expects the 0.25 percentage points hike in repo rate to reinforce the impact of past policy actions (it has hiked the repo rate 12 times in the last 18 months cumulatively by 3.50 percentage points to 8.25 per cent) to contain inflation and anchor inflationary expectations.