Reserve Bank today admitted that its own tight monetary policy, besides rising crude oil prices and uncertain global environment, poses a threat to India’s growth momentum in the current fiscal.
“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.
The slowdown in growth momentum may affect the quality of the assets of financial sector, according to the RBI’s Financial Stability Report-June 2011 released here today.
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 per cent, down from 8.6% recorded in FY11.
The report, however, said India’s macroeconomic fundamentals continue to remain strong, notwithstanding the prevailing inflationary pressures and concerns on the fiscal front.
The Reserve Bank said the recent decline witnessed in international oil prices “may not help in inflation management as complete pass-through of previous escalations is still to be affected”. The international prices of food, energy and commodities are expected to remain high during 2011-12, it added.
Moreover, inflation is likely to face upward pressure from higher subsidy expenditure of the government and the rise in wages and raw material prices, according to the report.
Referring to the recent growth in India’s exports, the RBI said it may off-set, at least partially, the expected increase in the import bill due to elevated oil and commodity prices.
On the current account deficit (CAD) front, the RBI said, “there does not seem to be an impending pressure on the financing of CAD”.
The central bank, however, cautioned that “as the advanced economies exit from the accommodative monetary policy, there could be some slow down in capital inflows”.
It said concerns over the global economic environment and the uncertainty revolving around the path of global recovery, are the “main underlying factors behind global imbalances that remain largely unaddressed”.
Referring to the the sovereign debt crisis in European countries like Greece, Portugal, and Ireland and the ballooning government debt in some advanced countries, the RBI said these “remain threats to global stability”.