The Reserve Bank of India may leave key interest rates unchanged when it reviews its monetary policy on Tuesday. This is on account of persistent price pressures in the economy.
The apex bank indicated as much in its latest Macroeconomic and Monetary Developments (MMD) report, released on the eve of the review. It said that price pressures remain with risks emanating from insufficient supply responses, suppressed domestic energy prices, the incomplete pass-through of rupee depreciation and slippage in fiscal deficit.
Due to visible signs of slowdown, the RBI had taken a breather by not hiking interest rates in its mid-quarter review of the monetary policy in December.
Between March 2010 and October 2011, the RBI maintained an anti-inflationary stance, raising interest rates 13 times.
According to the MMD report, “while in the short run, moderating inflation will provide some space for monetary policy to address growth concerns, in the absence of structural measures to address supply bottlenecks, this will, at best, be a temporary respite.
“In addition, the expansionary fiscal stance has emerged as an upside risk to inflation.”
The report also attributed the inflation to increase in support prices for agricultural commodities and higher-than-expected Government revenue spending.
GDP growth below trend
On account of large linkages of the manufacturing sector with global demand, investment uncertainty and high interest rates, GDP growth in India is moderating more than expected. It is likely to be below potential in 2011-12, but is expected to recover at a modest pace in 2012-13.
GDP growth moderated for the sixth consecutive quarter to 6.9 per cent in July-September of 2011-12, the lowest growth in the last nine quarters, the MMD report said.
The recent slowdown in production in crucial infrastructure industries such as coal and natural gas raises concerns about the sustainability of industrial growth.
The various lead indicators of the services sector also point towards a weakening of momentum with telecommunication, civil aviation and construction industries registering lower growth.