Indicating the possibility of yet another hike in key short-term interest rates in spite of a dip in the growth rate,the Reserve Bank of India (RBI) on Monday said inflation risks stay as falling global commodity prices provide limited comfort and the baseline inflation path still remains sticky and broadly unchanged from earlier projections. The central bank also cautioned that growth in 2011-12 is likely to moderate slightly from that projected earlier,investment is slowing down and business expectations have suffered,making policy choices more complex for the RBI. High inflation is likely to persist over next couple of months before moderating as falling global commodity prices so far has been offset by rupee depreciation. Incomplete pass-through is likely to limit the impact of falling global commodity prices, the RBI in its Macroeconomic and Monetary Developments Second Quarter Review 2011-12. Domestic price pressures still remain significant and broad-based. Food inflation is likely to stay elevated due to demand-supply mismatches in non-cereals and large MSP revisions. Real wage inflation has extended into Q1 of 2011-12. In sum,the inflation challenge remains significant, the RBI said on the eve of unveiling its mid-year monetary policy review on Tuesday. The majority view is that the RBI will raise repo rate by 25 basis points. It has increased repo and reverse repo 12 times since the past 19 months to contain runaway inflation,which has been remaining high for the past 13 months. The overall inflation in September stood at 9.72 per cent,which is higher than RBIs comfort level of 5-6 per cent. The RBI said growth risks have increased on account of global headwinds and domestic factors. On current assessment,growth in 2011-12 is likely to moderate slightly from that projected earlier. The policy choices have become more complex. In this backdrop,the monetary policy trajectory will need to be guided by the emerging growth-inflation dynamics even as transmission of the past actions is still unfolding, the central bank said. Some sacrifice of growth is inevitable in the current milieu of high inflation, the RBI said,hinting at another rate hike. The RBI had earlier estimated that the economy would grow by 8 per cent in the current fiscal,below 8.5 per cent recorded in 2010-11. Monetary policy has been significantly tightened since February 2010 with an effective increase of 500 bps in policy rates and a 100 bps increase in CRR; but monetary transmission is still unfolding and real interest rates remain low and non-disruptive to growth. Expressing concern over the fall in investments and growth,the RBI said,While persistent high inflation is impacting growth,investment is slowing down. The fall in new corporate fixed investment since the second half of 2010-11 has been significant and can impact the pipeline investment in coming years. Growth in 2011-12 is likely to moderate to below trend. Agriculture prospects remain encouraging with the likelihood of a record Kharif crop. However,moderation is visible in industrial activity and some services, it said.
