Mumbai: The Reserve Bank of India (RBI) on Monday warned that persistently high inflation poses a risk to sustaining growth, reinforcing expectations that it will lift interest rates by at least 25 basis points in its annual policy statement on Tuesday.
The RBI said headline inflation was likely to remain elevated in the first half of the fiscal year that began in April before declining in the second half of the year, but remaining above its comfort level.
The report said that GDP growth was likely to remain near trend levels, although risks are to the downside, and said high global prices of oil and other items posed the biggest risk to the country’s growth and inflation.
“Persistence of high inflation warrants continuation of anti-inflationary monetary stance to sustain the growth momentum over the medium term,” the report said.
The RBI’s survey of forecasters lowered its expectations for growth in the current fiscal year to 8.2% from 8.5% previously, while raising its outlook for wholesale price index inflation to an average of 7.5% from 6.6% earlier.
“The risks to inflation are on the upside, and it may remain elevated for some more time despite the current anti-inflationary bias in the monetary stance,” the report said.
The central bank has been one of the most aggressive anywhere in tightening monetary policy over the past year to battle inflation, raising its key policy rate, or repo rate , eight times since March 2010 by a total of 200 basis points to 6.75%.
However, headline inflation has remained stubbornly high, reaching nearly 9% for March , well above forecasts and breaching the central bank’s upwardly revised projection of 8%.
The RBI’s perceived comfort zone for inflation is 5-6% in the short term and 3-4% in the medium term.
“Balancing growth and inflation may be important in the short-run, but in the long run, persistent inflation is a significant threat to growth,” the report said.
India’s economy grew by about 8.6% in the fiscal year that ended in March. Many private forecasters have lowered their growth forecasts for the current fiscal year, although the government has predicted growth of about 9%.
The RBI is expected to raise interest rates by a quarter point on 3 May and analysts forecast a total of 75 basis points for the rest of 2011, including Tuesday’s expected rise, or 25 bps more than they expected in mid-March, a new Reuters poll found.
Some analysts expect the central bank to lift rates by 50 basis points on Tuesday.
Earlier on Monday, data showed that India’s manufacturing sector maintained its strong rate of expansion in April, helped by higher output and employment, even as a similar surveys showed slowing growth for China, where policymakers have taken numerous steps to tame rising prices.