Surging global oil prices and the RBI's tight monetary policy prompted the ADB to today lower its growth forecast for the Indian economy to 8.2% for the current fiscal from the earlier projection of 8.7%.
"Rising oil prices will bring down the growth rate to 8.2% in the year ending March, 2012. Also aggregate demand will tend to get squeezed on the RBI's tight monetary policy stance," Asian Development Bank (ADB) Principal Economist (India) Rana Hasan said here.
The multilateral lending agency had in September last year projected India's growth rate at 8.7% in 2011-12. The Indian economy is estimated to grow at 8.6% in the fiscal ended March 31, 2010.
The ADB's forecast, however, is in sharp contrast to the Prime Minister's Economic Advisory Council (PMEAC) projection of 9% growth in the current fiscal.
The ADB, which released its Asian Development Outlook Report 2011 today, said concerns over high food prices will now shift to oil, as elevated international oil prices will put pressure on inflation.
"Food inflation concerns will now shift to oil. The average crude oil price is likely to remain at $104 per barrel in the current fiscal and rise to USD 112 a barrel in fiscal 2012-13," Hasan added.
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With inflation now shifting to manufacturing items, the RBI will continue with its tight monetary policy stance, the ADB said. The central bank has hiked its key policy rates eight times since March, 2010, to tackle inflationary pressure.
"We expect another 50 basis points hike by RBI in both repo and reverse repo rate in the current fiscal," Hasan said.
Overall inflation, measured on the basis of wholesale prices, was 8.31% in February. The RBI expects it to come down to 8% by March end.
In the current fiscal (2011-12), the ADB expects inflation to be around 7.8% and for 2012-13, at around 6.5%.
The Asian Development Outlook Report 2011 said India's economic expansion will rebound in the 2012-13 fiscal and its GDP will grow by 8.8% as investment and overall economic activity pick up and the government pushes forward an economic reform agenda.
The ADB said India's current account deficit, representing net flow of income out of the country barring capital movements, would be around 3.5% in the current fiscal, higher than 3% in the year ending March 31, 2010.
The current account deficit has been sustained by capital inflows, but heavy reliance on portfolio capital relative to FDI raises vulnerability, the ADB said.
ADB Chief Economist Changyong Rhee said India's foremost development challenge is to achieve sustainable and inclusive growth.