The Reserve Bank of India (RBI) is bullish about the economy notwithstanding the threat of inflationary pressures and external shocks like the recent sub-prime crisis in the US. Though it said global imbalances could pose downside risks to the Indian economy, the Central Bank has forecast the continuation of the growth momentum during 2007-08 at a strong pace with the impulses of growth getting more broad-based.

“Steady increases in the rate of gross domestic saving and investment, consumption demand, addition of new capacity as well as more intensive and efficient utilisation/capitalisation of existing capacity are expected to provide support to growth during 2007-08,” RBI’s 345-page Annual Report 2006-07 released today stated. RBI’s GDP growth estimate stands at 8.5 per cent, with inflation at 5 per cent.

This is in tune with its first quarter review of the Annual Statement of Monetary Policy in July 2007, when it had projected a real GDP growth of 8.5 per cent. This number will stay assuming no further escalation in international oil prices and barring domestic or external shocks. Real GDP growth accelerated from 9 per cent in 2005-06 to 9.4 per cent in 2006-07.

The Central Bank also retained its inflation outlook at 5 per cent, assuming that aggregate supply management will continue to receive public policy attention and that a more active management of the capital account will be demonstrated. But it wants to continue the ongoing tight vigil.

“The possibility of inflationary pressures from domestic factors such as strong growth in monetary aggregates, elevated asset prices and large capital flows with implications for domestic liquidity conditions need to be recognised. Accordingly, a continuous vigil supported by appropriate policy actions by all concerned would be needed to maintain price stability so as to anchor inflationary expectations on a sustained basis,” the report said. Volatility in world financial markets may cloud global growth prospects and adversely affect emerging economies such as India, it warned. Rising protectionist measures, firmer oil prices, persisting global imbalances, adjustment in the US due to a housing slowdown and a potential shift in market sentiment pose downside risks to the global economy.

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