Mumbai: The reserve bank of India (RB) said inflation remains “sticky” even as risks to growth have risen, complicating its policymaking task a day before it is expected to raise interest rates, and said weakening investment imperils growth for the next fiscal year.
Tuesday’s expected rate increase by the RBI would be its 13th since March 2010.
“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 central bank noted on Monday in its quarterly report on macroeconomic and monetary developments.
India’s economy grew at 7.7% in the June quarter, its weakest pace in six quarters, but inflation came in at 9.7% in September despite monetary policy tightening that has made the RBI one of the most aggressive central banks anywhere over the last year and half.
Of 30 analysts polled last week by Reuters, 17 expect the RBI to increase the key lending rate by 25 basis points on Tuesday, while 13 expect it to hold the rate steady. The forecasts were among the most balanced in recent quarters.
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The central bank said investment demand is softening due to tighter monetary policy, impediments to completing big projects, weakening business confidence and a slowing global economy.
It said planned investment in new projects has fallen “significantly” since the second half of the fiscal year that ended in March, and remained low in the April-June quarter.
“Consequently, the pipeline of investment is likely to shrink, putting growth in 2012-13 at risk,” the RBI’s report said.
Since March 2010, the RBI has raised the repo rate , its policy interest rate, by a total of 350 basis points to 8.25%. Whatever it does on Tuesday, it is then widely expected to leave rates on hold for the remainder of the fiscal year.
However, inflation remains well above the RBI’s March 2012 projection of 7%, and the central bank noted that the recent decline in the rupee, which is down more than 13% against the dollar since its 2011 peak in late July, adds a new source of inflationary pressure.
The RBI’s perceived comfort zone for inflation is 4-4.5%.