Mumbai: The Reserve Bank of India (RBI) said on Tuesday it may have to give precedence to containing inflation over other policy objectives as it had emerged as a major concern.
It also said India needs to be cautious while formulating policies in the current fiscal year due to the uncertain global environment but the country’s growth outlook remained robust.
“The evidence of inflation persistence in India in the recent period suggests that despite the risk of a possible trade-off between growth and inflation in the short run, inflation containment may have to receive precedence over other policy objectives,” the central bank said in its annual report.
The RBI said the recent increase in fuel prices would add 2.9 percentage points to headline inflation WPI.
India’s widely watched wholesale price index (WPI) inflation stood at 9.97% in July, after staying in double digits for five months. The RBI projects inflation at 6% by the end of March.
The Indian economy, Asia’s third-largest, is expected to grow 8.5% in 2010-11 but recent data shows that the pace of growth in some sectors has moderated.
“With fiscal consolidation, favourable demography and further structural reforms, the potential growth could be raised to double-digit levels,” the report said.
India’s industrial output rose 7.1%, its slowest pace in 13 months, in June as growth in the cement and electricity sectors eased.
The bank said global volatility had affected the Indian stock market and the near-term outlook for trade and capital flows was uncertain globally.
“Over three months, perceptions about the sustainability of the global recovery have certainly turned a lot more adverse,” said Subir Gokarn, a RBI deputy governor, told reporters.
Govt borrowing a challenge
The RBI has raised its main short-term lending rate by 100 basis points since mid-March and the borrowing rate by 125 points, to rein in inflation.
So far in 2010, $12.4 billion of foreign funds have been invested in equities, compared with a record high $17.5 billion for the whole of 2009.
The report said robust proceeds from the 3G spectrum auction were unlikely to contribute to a faster fiscal consolidation due to additional spending.
“We are back in a situation where the pressure of the fiscal situation creates certain complications for both monetary management and also broader issues of macroeconomic management,” Gokarn said.
The government collected Rs1.06 trillion ($22.6 billion) in telecom spectrum proceeds, three times more than the budgeted expectations. It aims to contain the fiscal deficit at 5.5% of gross domestic product in 2010-11.