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Growth will improve, but inflation will stay sticky: RBI

Delhi,Business/Economy, Mon, 16 Apr 2012 IANS

New Delhi, April 16 (IANS) India's economic growth is likely to improve marginally in the current financial year from the projected growth of 6.9 percent in 2011-12, but inflation will remain "sticky" due to high oil prices, impact of hike in taxes, wages and large suppressed inflation, the Reserve Bank of India said Monday.


"Growth is likely to improve moderately in 2012-13. While inflation has moderated, risks to inflation are still on the upside," the RBI said in the "macroeconomic and monetary developments" released ahead the annual monetary policy statement for 2012-13 Tuesday.


Although the central bank said there was need to support growth, it did not give any indication whether it would cut rates to make credit cheaper. Most analysts feel that the RBI would cut key policy rates by 0.25 percent. If that happens, it will be the first rate cut in almost three years.


"With significant upside risks to inflation, monetary policy needs to keep them anchored, while shifting the balance of policy to arrest the deceleration in growth momentum," the central bank said.


The RBI said inflation is likely to remain at around the current level in 2012-13.


"The path of inflation in 2012-13 could remain sticky around current levels due to high oil prices, large suppressed inflation, exchange rate pass-through, impact of freight and tax hikes, wage pressure and structural impediments to supply response."


According to the data released by the ministry of commerce and industry Monday, inflation, based on wholesale price index, declined marginally to 6.89 percent in March as compared to 6.95 percent in the previous month.


Inflation in manufactured products fell substantially, but there was a sharp increase in food inflation.


"Primary food inflation reversed after a sharp decline as transitory effects waned. Energy prices are likely to remain a significant source of inflation ahead, as suppressed domestic prices of oil, coal and electricity prices are adjusted upwards," the RBI said.


The RBI pointed out that it had injected durable primary liquidity of over Rs.2 trillion through open market operations purchase and a 125 basis point reduction in Cash Reserve Ratio (CRR) to address the structural liquidity deficit.


Reserve money growth decelerated in the fourth quarter of 2011-12, reflecting the CRR cuts.


However, the pace of adjusted reserve money creation has recently picked up. Broad money growth fell below the indicative trajectory for end-March 2012, reflecting a deceleration in deposit growth, the RBI document said.


The RBI warned that it would difficult to cap subsidies at 2 percent of the gross domestic product (GDP) if the issue of petroleum subsidies were not addressed.


"Upside risks stem if phasing-in of flexible pricing of administered petroleum products is delayed. Under-recoveries would then exceed those in 2011-12 causing a large fiscal slippage. This poses challenges for aggregate demand management during 2012-13," it said.


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