The Reserve Bank of India is likely to raise interest rates again.
It has dropped ample hints to this effect by stating that inflation remains a concern and will continue to occupy an ‘important space' in monetary policy setting.
The RBI warned that upside risks to inflation path could result from rupee depreciation and higher commodity prices.
Wholesale price index based inflation has remained above 9 per cent over successive months in the first half of the year. Some sacrifice of growth is inevitable in the current milieu of high inflation, the RBI said in its latest report on macroeconomic and monetary developments, which was released on Monday on the eve of the second quarter review of monetary policy statement.
Real interest rates low
Monetary transmission, according to the RBI, is still unfolding in response to significant monetary tightening.
However, real lending rates have remained positive but low and supportive of growth in the recent period. What the RBI is saying is that it expects banks and non-banks to tighten their lending rates further.
Growth to moderate
The RBI may revise its growth outlook for 2011-12 downwards from 8 per cent. Though agricultural prospects remain encouraging with the likelihood of a record Kharif crop, moderation in growth is visible in industrial activity and some services, mainly construction and community, social and personal services.
Overall, the growth in the second half of 2011-12 is likely to remain below trend, the RBI said.
Investment slowdown
Indications are that investment demand is softening as a result of a combination of factors including monetary tightening, hindrances to project execution and deteriorating business confidence, said the RBI.
Planned corporate fixed investment in new projects declined significantly since the second half of 2010-11.
Consequently, the pipeline of investment is likely to shrink, putting 2012-13 growth at risk, warned the central bank.