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Says inflation may remain a sticky issue throughout the fiscal

The Reserve Bank of India (RBI), on Monday, hinted at lowering interest rates saying that focus of monetary policy needs to be shifted to arrest declining growth while keeping inflation under control.�

Inflation expectations moderated in the fourth quarter of 2012-13 but remain high. With significant upside risks to inflation, monetary policy needs to keep them anchored, while shifting the balance of policy to arrest the deceleration in growth momentum,” RBI said on the eve of annual monetary policy.

The Reserve Bank of India in its Macroeconomic and Monetary Development Report also cautioned that inflation is likely to remain “sticky” at the current level through out the fiscal (2012-13).

The inflation was 6.89 per cent during March, while the growth during 2011-12 declined to three-year low of 6.9 per cent. The government, however, has pegged it at 7.6 per cent for the current fiscal.

“Monetary policy needs to support growth without risking external balance or inflation by excessive fuelling demand,” it said.

Noting that inflation is under control, the report however, warns that high oil prices and suppressed inflation will still leave this at the current levels in the new fiscal and that excessive consumption demand has to be curtailed.

“The path of inflation in FY13 could be sticky with high oil prices, large suppressed inflation, exchange rate pass-through, impact of (indirect) tax hikes, wage pressures and structural impediments to supply response,” the central bank report said.�

However, the report points out that the Gross Domestic Product growth is likely to improve moderately in the current financial year.

“Growth is likely to improve moderately in 2012-13, supported mainly by a pick-up in industry on the back of consumption demand and some improvement in investment,” the report says, adding however, the recovery may be slow in the current fiscal, especially in the first half.

According to the RBI-appointed Professional Forecasters’ Survey, the 2012-13 growth is pegged at 7.5 per cent, which is 10 basis points below the government projection for the year. However, the apex bank has not made a GDP projection for the year yet.

“Early indicators suggest that growth may have bottomed out in the third quarter of 2011-12 but recovery may be slow during 2012-13,” it said.

During the third quarter of last financial year, GDP growth was at 6.1 per cent, which is the lowest quarterly growth in three years.

Also, recent IIP data for January and February have indicated a slip in growth momentum of Indian economy. About future investment climate, the central bank said if the pace of public expenditure increases, private investments are likely to see a complimentary effect.

“If increased capital outlays in the latest budget are speedily translated into government capital expenditure, it could crowd in private investment,” it said adding, however, that the fall in investment is likely continue in the near term.�