The Reserve Bank of India (RBI) on Monday said it did not expect an early respite from high inflation. As a result, economic growth could be hit, it said.
Policy interventions were needed to address near-term and structural imbalances if inflation was to be brought down on an enduring basis, RBI said its macroeconomic and monetary development report for 2010-11.
RBI will announce the annual monetary policy tomorrow.
“The inflation path remains sticky and risks are on the upside. Headline inflation could remain elevated in the first half of 2011-12 before declining gradually in the second half, but could remain above the Reserve Bank’s comfort level,” it said. It said high commodity prices, incomplete pass-through to consumers and possibility of food, fuel, mineral and metal prices staying firm increased inflation risks this financial year.
Having increased interest rates eight times in 2010-11, RBI is expected to go for another round tomorrow. The quantum of each increase in 2010-11 was 25 basis points. Economists say a stronger dose is needed to tame inflation. Inflation in 2010-11 was 9.4 per cent on an average.
Though growth in 2011-12 was expected to stay close to the estimated 8.6 per cent on the back of rebound in agricultural growth, risks might emerge from rising prices of oil and industrial raw materials, decelerating investment demand and high inflation, RBI warned.
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“Uncertainty in the Middle East and North Africa adds to the upward risk in international oil prices. An analysis in the Indian context indicates a likely adverse impact of rising input costs on GDP,” RBI said.
The report said business expectation surveys also exhibited moderation, while professional forecasters predicted lower growth and higher inflation.
As a result of high prices, RBI said, policy trade-offs might arise, as downside risks to growth and upside risks to inflation had increased. RBI said persistence of high inflation warranted continuation of an anti-inflationary stance to sustain growth over the medium term. “Experience suggests that high-growth phases have co-existed with low inflation,” RBI said.