Inflation risks rises, growth outlook has weakened

25 January 2012: The growth outlook and business climate have weakened but warned of upward risks to inflation, a day before it is widely expected to keep policy interest rates on hold. The RBI left interest rates unchanged in December after raising them 13 times between March 2010 and October 2011. Economists say it may choose to cut the cash reserve ratio (CRR), the share of deposits banks must maintain with the central bank, from 6 percent, to ease tight liquidity, at its review on Tuesday.

The critical factors in rate actions ahead will be core inflation and exchange rate pass through. The rupee depreciated by 16 per cent against the dollar in 2011, putting upward pressure on prices of imported goods, especially energy.

Annual headline inflation, as measured by the wholesale price index, slowed to a two-year low of 7.47 per cent in December, thanks to a sharp decline in food inflation. However, manufactured product inflation edged up from the previous month.Upside risks to inflation persist from insufficient supply responses, exchange rate pass-through, suppressed inflation and an expansionary fiscal stance. Investment in industrial capacity that will ease supply bottlenecks in Asia's third-largest economy has been slowed by sluggish decision-making in New Delhi, while programs that increase the spending power of rural Indians has driven up demand for items such as protein-rich foods.

Source: Times of India