Indicating that the accommodative monetary policy is likely to continue for the time being,a Reserve Bank of India survey on Monday said growth is likely to come down in 2009-10,posing a complex policy challenge in managing the trade-off between supporting growth and reining in inflation. The RBIs professional forecasters survey points to downward revision to the growth outlook from 6.5 per cent to 6.0 per cent in 2009-10, it said on the eve of the monetary policy review on Tuesday. The sectoral growth rate forecast for the agriculture sector was revised downwards from 2.5 per cent to (-) 1.4 per cent,whereas for industry,the assessment was revised upwards from 4.8 per cent to 6.3 per cent. For services,the forecasts suggest modest downward revision from 8.3 per cent in the earlier survey to 8.1 per cent in the current survey. Senior RBI officials were till recently talking about an early exit from the accommodative policy in order to tackle the rising menace of inflation. The lower growth forecast by the RBI could mean that its unlikely to withdraw its accommodative stance and hike rates. On the other hand,domestic bank credit growth remains anaemic at 10.8 per cent and there are a few lingering doubts about the sustainability of the recovery in economic activity especially due to the drought. In its macro-economic and monetary development report,the RBI said the current growth outlook for 2009-10 has both upside prospects as well as downside risks. Upside prospects to growth include the impact of the growth supportive fiscal-monetary policy stance,recovery in industrial production and core infrastructure sector,significant upturn in overall business confidence as per different surveys,strong recovery in the stock market with higher mobilisation of resources,return of capital inflows and improving outlook for the global economy which could boost the sluggish consumer and investor confidence. According to the RBI,the downside risks include the unexpectedly large deceleration in private consumption demand and some decline in corporate sales in the first quarter of 2009-10,the impact of deficient monsoon and recent floods in certain parts of the country on agricultural output and rural demand,sustained deceleration in credit growth and decline in exports. Inflation outlook is currently driven by the emerging signs of inflationary pressures,even though certain developments could neutralise the pressures. These include sluggish aggregate demand and negative output-gap,stabilisation of oil prices in last few months notwithstanding the increase in October 2009,adequate buffer stocks of foodgrains and the prospects of a better rabi crop that could partly offset the adverse impact of deficient kharif,selective import of certain commodities and the normal trend reversal seen in prices of food articles over different crop seasons, the RBI said . Emerging inflationary pressures may also persist and escalate further on account of the fading away of the base effect,cost push pressures through wage-price revisions in the face of elevated CPI inflation,challenges in improving the supply situation of essential commodities in the short-run,gradual pressure on global commodity prices along with global recovery,and rising inflation expectations on account of elevated CPI inflation, the apex bank said. From the stand point of monetary policy,anchoring inflation expectations in the face of sustained high inflation in essential commodities will be a key challenge, it said.
