July 31, 2012 / 19:10 IST
Moneycontrol Bureau
India is clearly going through a state of stagflation, wherein prices keep rising despite slowing down growth. According to the RBI's macroeconomic and monetary developments review Q1, FY13; the near-term outlook on inflation continues to be marked by a number of upside risks, despite the significant slowdown in growth.
This is evident when a professional forecasters' in a survey conducted by the Reserve Bank of India revised India's annual GDP growth estimate for FY13 to 6.5% from 7.2% earlier. Moreover, the average inflation outlook has been revised upward to 7.3% for 2012-13.
RBI will announce its first quarter monetary policy on Tuesday (July 31). A majority of market participants do not expect any major policy action including change in policy rates or cash reserve ratio. The higher rate of inflation is restraining the regulator from cutting rates aggressively even though the country's growth slows down.
"Even as the growth outlook remains weak, while inflation is likely to be sticky during 2012-13. As such, inflation and macro-risks will condition growth-enabling policy actions with a view to supporting recovery in a non-inflationary manner," RBI said in the macroeconomic review.
"Risks to inflation remain from unsatisfactory monsoon and increases in MSP even as growth slowdown eases demand pressures. While core inflationary pressures are currently muted, a continued rise in real wages may spill over to core inflation."
While RBI did not indicate to cut rates amid the ongoing threat of high inflation rate, it fully recognised the threat of waning GDP growth that needs to be revived by lifting the investors' confidence.
Amid widening fiscal deficit and worsening investment climate, RBI made a prescription for the government to take probable measures.
"The fiscal deficit target for 2012-13 is at a risk of being breached due to likely overshooting of subsidies and shortfall in receipts. To address this risk, fiscal space needs to be created by curtailing subsidies and significantly boosting government capital expenditures to provide an investment stimulus to the economy, which would help crowd-in private investment," RBI said.
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