Thaindian News

Mumbai, Oct 24 (IANS) The Reserve Bank of India (RBI) Monday said economic growth for 2011-12 will be lower than its earlier projection of 8 percent even as inflation remained “sticky” and was negatively impacting investment and industrial production.

“The baseline inflation path still remains sticky and broadly unchanged from earlier projections. On the other hand, growth risks have increased on account of global headwinds and domestic factors,” the RBI said in the background documents released ahead of second quarter monetary policy review.

The central bank said persistent high inflation was negatively impacting investments and growth.

“The policy choices have become more complex. In this backdrop, the monetary policy trajectory will need to be guided by the emerging growth-inflation dynamics even as transmission of the past actions is still unfolding,” it said.

With food inflation entering double digit figures and headline inflation almost touching the mark, most analysts feel the central bank would increase repurchase rate by 25 basis points to 8.50 percent in its second quarter policy review Tuesday.

The RBI has hiked key policy rates 12 times since March 2010 to control inflationary pressure. However, that hasn’t helped in bringing down inflation much. The central bank hiked repo and reverse rates by 25 basis points each to 8.25 percent and 7.25 percent respectively last month.

The 13th such hike since March 2010 will make home and auto loans costlier and put further pressure on economic growth.

Food inflation rose sharply to cross double digit levels at 10.6 percent for the week ended Oct 8 as against 9.32 percent in the previous week. The headline inflation based on the wholesale price index was recorded at 9.72 percent in September, according to the latest official data.

Various surveys conducted, both by the central bank and outside agencies, suggest that business expectations have suffered, while inflation expectations remained high.

Growth in 2011-12 is likely to moderate to below trend. Agriculture prospects remain encouraging with the likelihood of a record Kharif crop. However, moderation is visible in industrial activity and some services, it said.

Industrial production has slowed down considerably in the past few months. It was registered at a sluggish 4.1 percent in August rising a bit from the 3.8 percent seen in July — its lowest in almost two years.

GDP growth slowed to 7.7 percent in April-June period, the weakest in six quarters.

“In addition to domestic factors, global factors may slow down growth. With the increasing linkage of domestic industrial growth with global industrial cycle, some further moderation is likely ahead.”

The RBI said inflation was likely to remain high for the next couple of months before moderating.

“Domestic price pressures still remain significant and broad-based. Food inflation is likely to stay elevated due to demand-supply mismatches in non-cereals and large maximum selling price revisions. Real wage inflation has extended into first quarter of 2011-12. In sum, the inflation challenge remains significant,” it said.