Projecting an economic growth of 8.2% for 2010-11, the Reserve Bank of India (RBI) said that despite the plans to frontload government borrowings, the revival of credit demand from the private sector could exert some crowding out pressures.
In its report on Macroeconomic and Monetary Developments in 2009-10, released on Monday, the central bank cautioned that the strong rebound in asset prices needs to be monitored closely, given their implications for financial and macroeconomic stability. It also observed that a stronger recovery in India and the favourable interest rate differentials in the face of easy global liquidity conditions could lead to higher capital inflows, which may influence both exchange rate and asset prices.
The central bank also noted that inflation, in turn, could be expected to moderate in next few months, from the peak levels seen in recent months, thereby reflecting easing of supply pressures and the impact of necessary policy actions.
?In sum, there is an overall improvement in business sentiments and economic activity, but concerns relating to elevated levels of inflation remain in the near term. It is likely that the growth impulses could further strengthen during 2010-11, and therefore, anchoring inflationary expectations without hurting the growth process continue to be the focus of monetary policy,? the RBI observed.
The RBI has made clear that the Indian economy has exhibited a clear momentum in recovery in 2009-10 despite deficient monsoon. It has estimated a gross domestic product (GDP) growth at 7.2% for the financial year 2010, up from 6.7% in 2008-09.
Headline inflation, which remained at 9.9% in February-March 2010, has emerged as a major policy concern for the central bank. In the recent weeks, while food inflation is showing signs of slowdown, inflation in fuel and manufactured products are causing more generalised inflationary pressures, the central bank said.
Going forward, there could be upward pressures on inflation on supply side pressures, international commodity prices–especially of crude oil and industrial inputs have been rising in the recent months, thus, limiting the option of imports that could contain inflation in India—return of pricing power to the corporates with stronger revival in demand.
A revival in private consumption demand coupled with a revival in credit and money supply growth on the demand side and the gradual exit of the fiscal stimulus measures—-which has and would entail rollback of excise and customs duty reliefs as well as measures to align domestic prices with international oil prices—could also exert upward pressure on inflation.
At the same time, while the near-term factors corroborate the acceleration in inflation seen so far, certain factors like a satisfactory rabi production and arrival of new crops in the market could improve supply conditions, a normal monsoon may translate into improvement in agricultural production, and the impact of monetary policy actions already initiated by the central bank to anchor inflationary expectations could help dampen the inflationary pressures.
The growth outlook for the Indian economy in the near term remains positive on account of expectations of satisfactory rabi output—which may partially offset the decline in kharif output—expectations that the industrial sector would remain buoyant, and an increase in corporate sales and profitability. Other positive pointers are the pick-up in company order books and capacity utilisation as per different survey results, turnaround in exports with improving global conditions, pick-up in lead services indicators for transportation, telecommunication and construction, and a revival in the credit demand from the private sector, the RBI pointed out.
However, notwithstanding the overwhelming positive sentiments about stronger growth in the near term, certain downside risks remain, the RBI said.
The RBI said that while investment demand is showing signs of picking up, it is still much below the rate of growth in the pre-global crisis period. The private consumption demand, which accounts for about 60% of aggregate demand, needs to gain significant momentum, it said. Global economic recovery, though clearly visible, is still weak and thus has implications for sustaining the growth in Indian exports and the rising inflation, which may push costs through demand for higher wages and increase in input costs, the RBI said.
