RBI revises growth to 6.5 pc; inflation may rise to 5.4 pc

RBI hints at keeping rates unchanged
Last Updated : 27 July 2009, 15:20 IST
Last Updated : 27 July 2009, 15:20 IST

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Revising the growth projection to 6.5 per cent from the earlier 5.7 per cent for 2009-10, Reserve Bank on Monday said it expected inflation to go up to 5.4 per cent by this fiscal end.

In its macro economic review, the apex bank, however, said indications are that dampened growth impulses may continue due to significant delay in monsoon in certain parts of the country and persistence of global recession.

It said that recovery in export growth could be weak in the near-term, coupled with lagged impact on manufacturing growth.

The review, ahead of the quarterly review of RBI's annual monetary policy tomorrow, quoted the central bank's Professional Forecasters Survey to indicate that the average inflation in the fourth quarter of 2009-10 will be around 5.4 per cent.

On the inflation outlook, the review said, while certain indicators suggest possible firming up of inflation over time, other developments could also help in keeping the inflationary presures subdued.

The indication of inflation firming up by this fiscal could be due to high base-effect, increase in commodity prices, especially oil and global recovery, RBI said.

Noting that the global econoic environment continues to be uncertain, RBI said the conduct of the monetary policy had to contend with the scale and pace of external shocks and their spillover effects through the real, financial and confidence channels.

"The thrust of the various policy initiatives has been on providing ample Rupee liquidity, ensuring comfortable US Dollar liquidity and maintaining a market environment conducive for continued flow of credit to the productive sectors," RBI said.

Visible signs of price pressures pose complex challenges for the conduct of monetary policy, particularly given the dampened domestic demand conditions, the Reserve Bank said.

Wholesale price-based inflation was (-)1.2 per cent as on July 11 mainly due to base effect, even as most commodity prices have moved up sharply.

Consumer price inflation remained high in the range of 8.6-11.5 per cent during May-June 2009 on a YoY basis as compared with 8-9.7 per cent in March, the RBI said, noting that hike in motor fuel prices was fuelling price rise.

The apex bank said that the signs of improvements in the global financial conditions observed in the first quarter are necessary, but not sufficient, to iniduce a firm global recovery, particularly in view of the depressed demand conditions.

Reserve Bank further said that the deceleration in domestic demand and uncertain global conditions operate as the major drag for faster economic recovery.

To arrest the slowdown in the economy by stimulating demand, the apex bank has trimmed its cash reserve ratio (CRR) to 5 per cent, repo and reverse repo rates to 4.75 per cent and 3.25 per cent respectively since October last year.

According to senior bankers, surplus liquidity in the banking system and low demand for credit might prompt the Reserve Bank to maintain a status-quo in its key rates.

The central bank is also likely to lay out a more clearer roadmap to conduct the Government borrowing programme in a smooth manner.

It may also lower the credit, deposit targets for banks as it is difficult to meet those in the prevailing market conditions, bankers said.

Published 27 July 2009, 13:21 IST

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