RBI keeps the faith in economy

India's gross domestic product (GDP) is likely grow by 6-7.2 per cent in the current financial year ending March 2006 on strong services, industry and farm output, the Reserve Bank of India said in its first quarterly macroeconomic and monetary developments review, released today, a day ahead of its quarterly monetary policy review.

In April, it had forecast that the economy would grow about 7 per cent in the current financial year.

At the same time, the RBI highlighted its concerns of possible price risks on account of the rise in Dubai crude oil prices, which could pose risks to inflation in India.

Dubai crude prices had risen faster since January 2005, and posed significant risks to inflation in India as the basket of crude oil imported by India is weighted in favour of the Dubai crude variety, said RBI.

According to RBI, inflation was dominated by supply-side pressures such as high oil prices, in the first quarter of the fiscal year.

The pressures were particularly noticeable in April. In May and June, the inflation rate eased, pulled down by the base effect of higher prices last year as well as various monetary and fiscal measures to stabilise inflation expectations.

The average inflation rate was 6.3 per cent on July 2, above 5.3 per cent a year ago, it said. An industrial outlook survey by the Indian central bank showed that an index of business confidence for the second quarter (July-September) stood at 119.6, down 1.1 percentage points from the previous quarter.

The RBI said capacity utilisation was expected to be lower in the July-September, working capital finance requirement was expected to increase and companies were expecting a rise in the cost of raw materials.

Responses to the survey suggests "an improvement in the overall business situation, production, order books, employment, exports, imports, selling prices and profit margins during the quarter July-September 2005, vis-a-vis April-June," the quarterly review pointed out.

"The generally positive developments in agriculture, industry and services coupled with upbeat business confidence and expectations in the first quarter have imparted a degree of optimism regarding growth prospects for 2005-06," the RBI said.

In the credit market, key interest rates edged up as commercial credit offtake was strong and broad-based.

On the liquidity front, up to July 8, money supply expansion at 13.9 per cent was well within the indicative trajectory (14.5 per cent growth) set in the annual policy statement in April.

Reserve money increased by 18.1 per cent up to July 15.