Thaindian News

Mumbai, Aug 25 (IANS) The Reserve Bank of India Thursday warned that accepting high inflation as the “new normal” would be dangerous even as it predicted inflation to remain high in the short term and moderate to 7 percent by the fiscal ending March 2012.

“In face of nominal rigidities and price stickiness, there are dangers of accepting elevated inflation level as the new normal,” said the RBI in its annual report for 2010-11 adding that monetary policy had only limited effectiveness in arresting inflation in the wake of supply-side constraints.

The central bank, however, said if the global economy faltered going ahead, it could bring down commodity prices, which in turn would have a dampening impact on inflation.

India’s annual food inflation rose to 9.80 percent for the week ended Aug 13, while the headline inflation based on wholesale price index was recorded at 9.22 percent in July.

In the report, the RBI also maintained its projection for economic growth at 8 percent during the current fiscal, but also cautioned of a decline in industry output and a fall in exports, which have been growing at a fast pace since April.

“The outlook for the industrial sector in 2011-12 remains uncertain, with the downside risks outweighing the upside risks,” the RBI said.

“The continuance of robust performance of exports in 2010-11 and 2011-12 so far faces downside risks. The impact of growth slowdown in the advanced economies could partly be mitigated by continued diversification of exports,” it added.

Exports grew almost 46 percent in the first quarter of 2011-12.

The RBI also said that in the wake of a weakening in global economy, some spill over effect would be seen in India as well, which could result in widening fiscal deficit.

“On current assessment, the fiscal deficit in 2011-12 is likely to overshoot the budgeted projections. If the economy slows down beyond what is currently anticipated, the resultant revenue erosion could magnify the fiscal slippage,” said the central bank.

” At the same time, the fiscal space to support any counter-cyclical policies is more limited than what existed at the time of the global crisis of 2008.”