The Reserve Bank of India accepted that its aggressive monetary policy stance on inflation along with elevated crude oil price and uncertainty in global economy are posing risk to India’s growth momentum in the present financial year. "The slackening of global recovery, high oil and commodity prices, deceleration in domestic industrial growth, uncertainty about continuation of strong growth in agricultural sector and impact of monetary policy actions pose downside risks to India’s GDP", RBI said in a report.
According to the RBI's Financial Stability Report-June 2011, the deceleration in growth momentum may affect the quality of the assets of financial sector. The central bank also cautioned that country may experience a slowdown in capital inflow in current fiscal year as the advanced economy are adopting tighter monetary policy, this deceleration in capital inflow would create difficulties for government to fund its increasing current account deficit for present year.
According to the report, the inflation is expected to face upward pressure from higher subsidy expenditure of the government and the increase in wage and raw material prices. The central bank, which has raised key interest rates nine times since March 2010 to check price rise, has pegged India's gross domestic product (GDP) growth rate for the current fiscal at 8 percent, down from 8.6 percent recorded in FY11. However, the report also stated that India's macroeconomic fundamentals continue to remain strong, despite the prevailing inflationary pressures and concerns on the fiscal front.
As per the RBI’s report, the recent slowdown in international oil prices ‘may not help in inflation management as the complete pass-through of last escalation of oil price is still to be affected’. The international prices of food, energy and commodities are expected to remain high during 2011-12, it added.
On the current account deficit (CAD), RBI’s report said, ‘there does not seem to be an impending pressure on the financing of CAD’. On recent growth in country’s export, the central bank said, it may off-set, at least partially, the expected increase in the import bill due to elevated oil and commodity prices. In May, India’s export registered impressive growth of 56.9 percent to $25.9 billion, whereas imports for the month rose 54.1 percent to $40.9 billion. However, the trade deficit raised to 67 percent in May from last month to $15 billion, this three year high increase in trade deficit is due to increase in demand for oil, gold and industrial machinery.
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