Mumbai: The Reserve Bank of India (RBI) on Thursday warned of difficult days ahead, saying inflation will remain at elevated levels for some more time while the economic growth rate will moderate in the current fiscal.

"The Indian economy needs to brace up for a difficult year from a macroeconomic perspective. With weak supply response, inflation remains an important macroeconomic challenge," RBI said in its Annual Report for 2010-11.

It said that growth is likely to remain at 8 per cent in 2011-12, lower than 8.5 per cent clocked in the previous fiscal. RBI said if the global financial condition deteriorates, it could further lower the growth projections in the current fiscal.

"Growth prospects for the year 2011-12 seem to be relatively subdued compared to the previous year due to a number of unfavourable developments. Global uncertainties have increased," the report said.

It said that persistent inflationary pressure, rising input cost, rise in cost of capital due to monetary tightening and slow project execution are some of the factors which could put pressure on growth. The overall inflation in June stood at 9.22 per cent.

"Inflation is likely to remain high and moderate only towards latter part of the year to about 7 per cent by March 2012," RBI said.

To sustain high growth in medium term, it was important to shore up investment, RBI said, but added that the scope for stimulus was limited. "Fiscal and monetary space is limited for any counter cyclical stimulus if global conditions deteriorate."

RBI said that there is a risk of increasing fiscal and current account deficit. It added that the US rating downgrade has increased global uncertainties and its impact on India would depend upon its effect on trade, capital flows and global commodity prices.

It further said that even as farm sector outlook remains encouraging, industrial growth is likely to decelerate.

To tame inflationary pressure, RBI has hiked key policy rates 11 times since March 2010 by a cumulative 325 basis points. This led to a rise in borrowing cost which, in turn, played a role in decelerating growth of industrial production.

During the first quarter (April-June), industrial output, as measured by the Index of Industrial Production (IIP), stood at 6.8 per cent as against 9.6 per cent in the same period last year.

RBI also said that monetary policy has an important role to play in bringing down inflation, but it may find it difficult to deliver the objective unless complementary policies are put in place.