The UPA government and the Reserve Bank of India (RBI), which successfully steered the Indian economy through the world’s worst economic crisis in eight decades, is facing a bigger macroeconomic challenge at home: controlling prices without hurting growth.
The RBI on Tuesday acknowledged that underlying inflationary pressures remain strong, even as risks to growth are emerging, hinting that it was not yet done with the rate-hiking cycle.
It also had a strong message for all quarters in its quarterly review of the monetary policy: brace yourself for a spell of high inflation, at least in the near term.
“The RBI is strongly of the view that controlling inflation is imperative both for sustaining growth over the medium-term and for increasing the potential growth rate,” RBI governor D Subbarao said in his statement.
“Both the level and the persistence of WPI inflation are a cause for concern… Inflationary pressures are clearly very strong,” RBI said in the review. “There is a need to persevere with the anti-inflationary stance.”
While RBI has maintained the economy’s growth forecast at 8% for 2011-12, it obliquely hinted that there were signs of an imminent slowdown.
“There are signs that growth is beginning to moderate, particularly in respect of some interest sensitive sectors,” the statement said.
The central bank raised the forecast for inflation to 7% from earlier 6% at March next year.
The headline WPI inflation rate for the first quarter of this fiscal year remained stubbornly close to double digits — it was 9.44% in June — and inflationary pressures continued to be broad-based.
Non-food manufactured product inflation ruled above 7% in the first quarter, suggesting that producers, operating at high capacity utilisation, are able to pass on the rising commodity input prices and wage costs to consumers.