Mumbai: With inflation hovering around the double-digit mark, the Reserve Bank on Monday hinted at another round of rate hike even if it means sacrificing growth.

"Some sacrifice of growth is inevitable in the current milieu of high inflation," the Reserve Bank said in its Macroeconomic Review, released on the eve of Mid-Year Monetary Policy Review.

The central bank, which had earlier projected 8 per cent GDP growth for the current fiscal, on Monday said the expansion could moderate as there are downside risks in view of global factors.

"While persistent high inflation is impacting growth, investment is slowing down. The fall in new corporate fixed investments since the second half of 2010-11 has been significant and can impact the pipeline investment in coming years," it said.

The Reserve Bank of India (RBI) has already raised interest rate 12 times since March, 2010 to contain inflation, which has remained stubbornly high. In fact, food inflation was 10.6 per cent for the week ended October 8.

The central bank has also raised concerns over various parameters, including fiscal deficit, realisation from disinvestment, high current account deficit etc.

While experts are projecting a 25 basis-point increase in policy rates tomorrow by RBI, the industry wants the Reserve Bank to refrain from further hike in view of slowing growth, especially in the manufacturing sector.

"...The policy choices have become more complex. In this backdrop, the monetary policy trajectory will need to be guided by the emerging growth-inflation dynamics as transmission of the past actions is still unfolding," the RBI said.
The RBI said the risk to growth is becoming visible and the challenge of bringing down inflation to an acceptable level on a sustainable basis remains significant.

It further said the government is likely to miss the revenue collection and disinvestment targets for the current fiscal, pushing up the fiscal deficit budgeted at 4.6 percent of the GDP.

"There is a possibility of the Central government missing its disinvestment target, which would add to the pressures of achieving the budgeted fiscal deficit for 2011-12," it said.

The Reserve Bank said the investment demand is softening as a result of tightening of the monetary policy, deteriorating business confidence and project executions facing hindrances among other things.

While growth in the current fiscal is likely to moderate to below trend, agriculture prospects remain encouraging with the likelihood of a record kharif crop.

"However, moderation is visible in industrial activity and some services," the central bank said.

The country's industrial output as measured on Index of Industrial Production (IIP) grew by a dismal 4.1 per cent in August (latest data) as high interest rates and gloomy global indicators weighed against the factory output.

In addition to domestic factors, the RBI said global factors may slow down growth.

"With the increasing linkage of domestic industrial growth with global industrial cycle, some further moderation is likely ahead...," it said.

It said capacity constraints seem to be easing in some manufacturing segments, especially cement, fertilisers and steel. Besides, construction activity has slowed and leading indicators suggest that going forward, "services growth may slightly weaken".

Highlights of RBI policy

Following are the highlights of the Reserve Bank of India's Macroeconomic and Monetary
Developments: Second Quarter Review 2011-12:

Another round of rate hike likely on Tuesday

Economic growth may fall below earlier estimate of 8%

Agriculture growth prospects remain encouraging

High inflation likely to persist over next couple of months

Fiscal deficit target of 4.6% for FY12 may be breached

Credit growth expected to moderate as growth slows

Investment demand softening due to monetary tightening; could impact pipeline investment in coming years

Exports, overseas remittances could decelerate

Disinvestment target of Rs 40,000 crore may be missed

There is a risk of not meeting the tax collection target