The Reserve Bank of India on Monday cut its gross domestic product (GDP) growth estimate for fiscal 2012-13 to 7.2 per cent.
GDP would improve moderately, the central bank said, adding that growth must be in a non-inflationary manner.
"While inflation has moderated, risks to inflation are still on the upside. Accordingly, monetary policy needs to support growth without inflation and external imbalances by excessively fuelling demand," the central bank said.
It also said that oil prices and a weak rupee pose inflationary risks. It also said that inflation could remain sticky in the current fiscal and reiterated that policy must not exacerbate inflation.
“Inflation is likely to remain sticky at about current level during the year with the probability of further significant moderation being small,” RBI said
Inflation trend will remain 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, the RBI said
While inflation expectations moderated in the last quarter of fiscal 2013, they remained high, the central bank said.
“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,” it said. .
RBI noted that its two-stage 125 basis point cut in cash reserve ratio (CRR) had eased liquidity pressure. CRR is the portion of deposits that banks must keep with the RBI. One basis point is one-hundredth of a percentage point.
On the fiscal situation, the RBI said the outlook is subject to subsidy risks. It pointed out that “Fiscal policy has a key role to play in speeding up public investment to crowd in private investment while ensuring fiscal consolidation.”
The apex bank said it expected a normal monsoon in 2012, and that the outlook for the agriculture sector was "encouraging".
The Reserve Bank warned that growth may have bottomed out in the third quarter of 2011-12, and that the recovery ahead likely to be slow.
It pointed that leading indicators such as pick up in credit, cement off-take, expansion mode in PMIs (purchasing managers indices), and an uptick in Reserve Bank's services composite indicator as pointers to the bottoming out of growth.
Revival in the industrial sector hinges on the impetus to ease supply-side constraints, especially in the energy and mineral deficits, the central bank noted.
"Government initiatives to revive the power sector would be helpful in reviving the growth momentum,” it said .
On the demand side, the apex bank said the growth slowdown has been driven by a sharp fall in investment, some moderation in private consumption and a fall in external demand.
“The drag from investment is likely to continue in the near term due to low pipeline investment and new corporate investment intentions,” the bank said, adding that the decline in saving and investment rates are a concern for long-term growth performance..
The bank also warned higher risks on the demand side, particularly on petroleum products if market-driven pricing 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,” the central bank said. .
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