Inflation remains a persistent concern but the Reserve Bank of India is bullish on the growth story. The central bank expects a robust and broad-based growth to co-exist since the downside risks have subsided and the economy is back on its earlier high growth trajectory.
“The robust GDP growth in the first half of 2010-11 suggests that the economy has returned to its earlier high growth path. Satisfactory kharif production and higher rabi sowing point to stronger contribution of the agriculture sector to overall GDP growth in 2010-11,” said the RBI in its report on macroeconomic and monetary developments ahead of its monetary policy review on Tuesday.
RBI, however, is concerned over high inflation and in its policy announcement on Tuesday, is set to take steps that can tame inflation.
“Since persistent high inflation could endanger the growth objective and also amplify risks to inclusive growth, containing inflation will have to be the predominant objective of monetary policy in the near-term,” it said in a signal statement.
Economists feel that since RBI is convinced on the price front, it is expected to take steps that aim to control inflation.
“I think the monetary policy would be less of a balancing act and would be entirely focussed to control inflation as RBI feels growth is intact,” said Abheek Barua, chief economist at HDFC Bank.
The central bank has raised concern over the volatility in the industrial production data and is also worried about the durability of recovery momentum in developed economies but feels that growth in private consumption expenditure has been strong in the first half.
“Strong recovery in investment demand that started in the last quarter of previous year, has consolidated and remained strong,” said the central bank.
While the fiscal deficit is expected to be in the budgeted level, RBI has projected that high growth in capital expenditure would add to overall growth momentum from private demand.