Persistent inflation warrants tight-money policy

India's economic growth is expected to stay around the trend level of 8.0 per cent despite the signs of moderation. However, on current reckoning, the risks of inflation to overall economic growth remained, the Reserve Bank said while announcing the first quarter monetary policy stance today.

RBI said the continued inflationary pressures that have spread from food prices to non-food and manufacturing goods have increased downside risks for the economy.

"Overall some moderation in growth is expected in 2011-12. Various expectation surveys also indicate the same," RBI said in its macroeconomic survey released alongside the policy review.

"Growth showed some moderation during Q1 of 2011-12. These were visible from deceleration in IIP during April-May 2011 and in consumption of cement, steel and automobiles during Q1 of 2011-12. Manufacturing and services PMIs also show that growth is turning softer" RBI said in its survey.

Price pressures, which will persist through Q2, are expected to moderate towards the later part of 2011-12. Bur, for arresting inflation, breaking inertial dynamics of wage and food price rise is important, RBI said.

Also, RBI said, any significant departure of monsoon from normal, a collapse or re-build of global commodity price bubble, and Euro zone debt crisis assuming full-blown proportions would pose risks for baseline economic growth.