Inflation is “sticky” and GDP growth in the current fiscal year is expected to be lower than the earlier envisaged 8%, the Reserve Bank of India (RBI) said on Monday, a day ahead of its second quarter monetary policy review.
It was more or less certain that the central bank will hike its signal repo rate – its 13th increase in 19 months -- at its meeting on Tuesday as its report on macroeconomic and monetary developments spoke of the challenges ahead.
“Inflation risk persists. The baseline inflation path still remains sticky and broadly unchanged from earlier projections,” said the RBI. “In this backdrop, the monetary policy trajectory will need to be guided by the emerging growth- inflation dynamics even as transmission of the past actions is still unfolding,” added the regulator.
The regulator has hiked policy rates by 3.5 percentage points since March to choke demand and contain inflation, which stubbornly remained at 9.7% in September.
RBI said growth risks had increased on account of “global headwinds” – a reference to prospects of a recession in the US and a credit crisis in Europe. “On current assessment, growth in 2011-12 is likely to moderate slightly from that projected earlier,” it said. RBI had earlier projected GDP growth for 2011-12 at 8%, down from 8.5% in the previous year.
The central bank said planned investment in new projects has fallen ‘significantly’ since the second half of the fiscal year that ended in March, and remained low in the April-June quarter. “Consequently, the pipeline of investment is likely to shrink, putting growth in 2012-13 at risk,” the report said.