Mumbai, Jan 25 (Agencies): The Reserve Bank of India (RBI) on Tuesday said that economic growth rate will moderate in the fiscal year 2011-12. The RBI retained the GDP growth projection for this year at 8.5 per cent.

"Looking beyond 2010-11, the Reserve Bank expects domestic growth momentum to stabilise, though the GDP growth rate may decline somewhat, as agriculture reverts to its trend (assuming a normal monsoon)," the central bank said in its third quarter review of monetary policy.

As regards inflation, the RBI said that it would ease in the first quarter of the next fiscal (2011-12) but added that several upside risks are already visible in the global environment and more may surface domestically.

The RBI's projection of India's GDP growth rate stabilization comes amidst talks of double-digit growth to match China's economic growth rate of 10.3 per cent in June quarter.

"...the baseline projection of real GDP growth is retained at 8.5 per cent as set out in the Second Quarter Review of Monetary Policy of July 2010 but with an upside bias," it said.

The central bank expressed satisfaction that Indian economy has bounced back to its pre-crisis growth trajectory, at 8.9 per cent in the first half of 2010-11, powered by domestic factors, including good agricultural growth and rising exports.

It expects the country's growth momentum to persist in the coming years, on the back of robust corporate sales and healthy tax collections, along with a booming service sector.

RBI ups inflation to 7 pc by March-end

The Reserve Bank on Tuesday upped the inflation projection to 7 per cent by March-end, from the earlier estimated 5.5 per cent and warned against a possible spill over of high food and energy prices to a more generalised inflation.

Earlier, the apex bank had projected inflation at 5.5 per cent by March 2011 and the latest higher estimate is on account of high food, fuel prices high and persistent demand pressures building up in the economy.

The overall inflation for December shot up to 8.43 per cent on high prices of food items, from 7.48 per cent in November.

Food inflation remained in double digit through out December and was 15.52 per cent for the week ended January 8. It had touched a high of 18.32 per cent in December 25.

It said prices of some commodities rose sharply in the recent period even as global recovery was fragile. "Should these trends continue, they will impact inflation, domestically and globally."

Asserting that the current demand-supply mismatch for some commodities will persist, it said, "...The baseline projection for WPI inflation for March 2011 is revised upwards to 7 per cent from 5.5 per cent."

To cool inflation, the central bank on Tuesday raised short-term lending (repo) rates and borrowing (reverse repo) rate by 0.25 per cent (25 basis points) each.
The RBI said the food inflation is likely to remain high in the near term because of demand-supply mismatches in several non-cereal food items like pulses, oilseeds, eggs, fish, meat and milk.

The central bank said there can be an up to 9 basis points impact on WPI-inflation owing to fuel and aviation turbine fuel (ATF) price hike.

Food price, demand pressure to shape inflation

Inflation outlook going forward would be influenced by factors like food price situation,
behaviour of global commodity prices and the extent to which demand-side pressures may manifest, the apex bank said.

Domestic food price inflation has witnessed a high volatility since mid-2009 due to both structural and transitory factors and a significant part of the recent increase is due to structural constraints.

Transitory supply-shocks have resulted in a sharp increase in the prices of some food items, it said.

As food prices have spiked in many countries and India being a large importer of certain food items like edible oils, the domestic food price situation could be exacerbated by the increase in global food prices, it said.

On global commodity prices, the RBI said that some of their prices have risen sharply in the recent period, even as the global recovery was fragile.

Efforts required to raise FDI inflows

The central bank also said that efforts should be made to attract more Foreign Direct Investment (FDI) in the country, as they are more stable than portfolio investments.

These remarks come a day after the central bank said that environment-sensitive policies are hurting FDI in mining, township and ports sector.

"..The composition of capital inflows needs to shift towards longer-term commitments, such as FDI (Foreign Direct Investment)," the RBI said.

During the April-November period, FDI fell to USD 19 billion year-on-year, from over USD 25 billion in the corresponding period last year.

The Reserve Bank said the capital flows into India may be adversely affected on rebound into the global economy.

"Faster than expected global recovery may enhance the attractiveness of investment opportunities in advanced economies, which may impact capital flows to India. This may
increase the vulnerability of our external sector," RBI said.

The RBI in its third quarter policy review warned that a high current account deficit (CAD) of 3.5 per cent of the GDP in the 2010-11 fiscal is not sustainable and may widen further with the recovery of the global economy.

In the July-September quarter this fiscal, the CAD surged by 72 per cent to USD 15.8 billion, compared to USD 9.2 billion in the same period last year due to higher imports.