RBI outlook sees growth at 7%, price risks remain

India’s growth is likely to slow down in 2011-12, the central bank has said in its quarterly report on Monday.

The Reserve Bank of India ‘Macroeconomic and Monetary Developments: Third Quarter Review 2011-12’ said upside risk to inflation still persists, and growth could be lower than earlier projections.

In the document, which serves as a background to the monetary policy statement to be announced on Tuesday, the regulator said: "Since (October 2011), developments on both the global and domestic fronts have not been favourable and the growth is likely to turn weaker than earlier anticipated."

In its second quarter review on October 25, RBI had revised down the baseline projection of GDP growth for 2011-12 from 8% to 7.6%. Now, the RBI-sponsored survey by professional forecasters has estimated growth for the current fiscal to 7%.

“Even as the growth slowdown emerges as the major challenge, inflation risks persist, posing a challenge for monetary policy in achieving low and stable inflation with minimal sacrifice of growth,” RBI said.

The Bank expects inflation to reign at 7% by the end of the current fiscal, but warns of further upside risks in food prices.

“Inflation is moderating led by sharp decline in food inflation and is broadly in line with the 7% projection for March 2012,” it said. “However, inflation and expectations of inflation remain high and upside risks emanate from exchange rate pass-through, revisions in administered prices and higher-than expected current fiscal spending.”

The central bank has hiked interest rates by 3.75 percentage points between March, 2010 and October, 2011. In 2011-12 itself, the RBI increased repo rate, the rate at which the banks borrow from it, five times (by 1.75 percentage points).

The RBI expects growth to improve in the coming fiscal, but weak investment and external demand may keep recovery slow.