Mumbai, August 27: India’s deficient monsoons may affect the inflation outlook more than growth prospects, the Reserve Bank said on Thursday, adding that prolonged expansionary fiscal and monetary policies threatened to push up prices and eventually crimp growth.
Its warning tone on rising price pressures comes after many analysts have scaled down growth projections and pushed back their expectations for policy tightening further into 2010.
The Reserve Bank of India (RBI), in its annual report for 2008/09, did not specify when it thought policy accommodation should start to be withdrawn, but said if it was maintained for too long it could fuel inflation in the near term and constrain growth over the medium term.
Emerging signs of recovery are yet to indicate any clear trend, the Reserve Bank of India said.
Returning to a high growth path at the earliest remained the key near-term policy challenge, it said, adding a credible action plan on fiscal consolidation was necessary to achieve that.
“The deficient monsoon could affect the inflation outlook more than the growth prospects,” the RBI said in its 476-page annual report.
India’s annual June-September monsoon rains, a key factor for the country’s farm output and growth, are 25 percent below normal so far in 2009, and nearly half the country’s districts have been declared drought areas.
While India’s fiscal year runs from April to March, the RBI’s accounting year runs from July to June.
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The RBI said it faced a complex dilemma from the unpleasant combination of subdued growth alongside an emerging risk of high inflation.
“The emerging inflation outlook and the medium-term consequences of sustained accommodative monetary stance for inflation suggest that timing and pace of exit from the current accommodative policy stance would be a major challenge,” the RBI’s report said.
The government’s large borrowing plans and fiscal deficits complicated policy by adding to inflationary expectations, which could put upward pressure on interest rates, it said.
The government is borrowing a record 4.51 trillion rupees ($92 billion) in 2009/10 (April/March) to fund a fiscal deficit forecast at 6.8 percent of gross domestic product, a 16-year high.
Last month, the central bank raised its inflation projection for the end of 2009/10 (April/March) to 5 percent from 4 percent — a forecast that analysts say may be too low — and tweaked its growth outlook to 6 percent with an upward bias.
India’s wholesale price index (WPI), the main inflation measure, fell 0.95 percent in the 12 months to Aug 15 even as food prices surged an annual 13.3 percent, data showed on Wednesday.
Rather than deflation, the current negative annual WPI readings since June largely reflect rapid price increases last year — an effect the central bank said would end by October — and the price index has been rising on a weekly basis since March.
—-Agencies