The Reserve Bank of India (RBI) expects the Indian economy to record a robust and broad-based growth despite nagging inflation, which may go up in the near term. While the downside risks to growth have receded, upside risks to inflation have in fact increased, RBI said.
"Since a lower inflation regime is essential for sustainable high growth, containing inflation becomes the dominant policy objective in the current environment," RBI said in its macroeconomic outlook release ahead of the quarterly monetary policy due tomorrow.
Banks raised their deposit rates to improve mobilisation of funds. Several banks also revised their base rates upwards in the range of 25-100 basis points, while simultaneously also increasing effective lending rates.
Upside risks to inflation from structural demand-supply imbalance in certain sectors and hardening global commodity prices, especially crude oil, have increased, RBI said.
While the wholesale price index-based inflation had witnessed modest softening during August-November 2010, renewed price pressures have started building up towards the year-end, driven by factors that were largely unanticipated, the RBI noted.
While the strong growth during the first half of the year has put the economy back on its earlier high growth trajectory, RBI said, sectoral imbalances pose risks to inflation.
RBI said satisfactory kharif production and higher rabi sowing point to stronger contribution of the agriculture sector to overall GDP growth in 2010-11.
Industrial production has shown near double-digit growth but the sectoral imbalances have given rise to significant volatility, adding uncertainty to the outlook, RBI said.