Economic growth is likely to fall to 6.5%, inflation accelerate and fiscal deficit widen, the Reserve Bank of India said on Monday, painting a gloomy macro-economic scenario a day before the monetary policy review.
In its quarterly report on macro-economic and monetary developments, RBI lowered the gross domestic product growth forecast to 6.5% for the current financial year from 7.2% pegged in the previous forecast announced in April.
"The outlook for the Indian economy remains weak. In an uncertain global economic environment, the interplay between growth slowdown, high inflation, wide current account, fiscal gaps and falling investment has weakened the economy," RBI said.
The country's GDP expanded by 5.3% in the quarter ended March, the weakest in 9 years.
The central bank said newer risks to growth had arisen from slowing global trade, domestic supply constraints, bottlenecks of industrial inputs, particularly with regard to coal and electricity, and a less-than-satisfactory monsoon so far.
Until July 27, 2012, the monsoon was deficient by 21% compared with the long period average. In terms of the Reserve Bank's production weighted index, the deficiency was 24%. "This is likely to impact kharif crops, especially coarse cereals and pulses."
The RBI is scheduled to announce the first quarter review of the monetary policy on Tuesday.
While some analysts are betting on 25 basis points (0.25%) cut in key policy rates, a majority of them feel that the central bank is not in a position to cut rates given the current macro-economic situation.
In the mid-quarter review announced in June, the central bank had left key policy rates unchanged after cutting the rates by 50 basis points in April.
"A 50 bps repo rate cut, following a 125 bps CRR reduction, coupled with active open market operation purchases have significantly eased monetary and liquidity conditions during 2012-13 so far," RBI said.
The central bank said fiscal deficit target for 2012-13 is at a risk of being breached due to likely overshooting of subsidies and shortfall in receipts. The government has set a target to curtail fiscal deficit at 5.1% of GDP in the current financial year as compared 5.76% recorded in the previous year.
It also said surveys of business expectations confirm that confidence levels are low. On the other hand, inflation expectations remain sticky.
"The economy has reached a critical point at which economic activity can spin up or down depending on how the policy uncertainty is addressed and supporting measures put in place," it said.
"Leading indicators, especially credit growth and PMIs (Purchasing Managers' Index), suggest that a recovery is still possible with appropriate policy action," it added.