The International Monetary Fund (IMF) expects Indian economy to grow by 8.8 per cent during the current financial year, up from 7.4 per cent a year ago, mainly driven by robust growth in farm sector and pick up in consumption.

The multilateral lending agency, however, expressed concern over rising prices and underlined the need for controlling inflationary expectations by more monetary actions by the Reserve Bank.

“Indian economy is projected to grow by 8.8 per cent in 2010-11…This year’s growth is already benefiting from the rebound in agriculture and pick up in private consumption and employment prospects have improved and disposable income continues to rise,” the IMF said in a report after Article IV consultations with the Indian officials.

The economy expanded by 8.9 per cent during the first half of the current fiscal and, according to the government estimates, may revert to the pre-global crisis level of 9 per cent growth.

However, the IMF has projected moderation in growth form the current high levels to 8.1 per cent next fiscal.

Listing rising prices as a major area of concern, the IMF said the RBI could take more monetary steps to contain inflationary expectations.

“We see room for further rate increase (by RBI) but at the same time it has to be done gradually and needs to be looked at continuously,” senior Resident Representative of the IMF Sanjaya Panth told reporters in Delhi.

The food inflation, according to the data released by the government, rose to the yearly high of 18.32 per cent for the week ended 25th December.

The overall inflation was 7.48 per cent in November.

The inflation, according to IMF, could moderate to 6.5 per cent by March end.

Besides inflation, high capital inflows and uncertainty in the global economy are the other areas of concern that could impair growth.

“Risks to growth are broadly balanced with downside risks relating mainly to the global economy. Surging capital inflows could further spur investment but could complicate macroeconomic management”, the report said.

In 2010, the overseas portfolio investment more than doubled to USD 39 billion from USD 18 billion a year ago.

According to Panth, “the current inflows are in comfortable zone and there is no need for capital control. However, inflows could increase absorptive capacity in future.”

Following the global financial meltdown, the growth rate of the India economy slipped to 6.7 per cent in 2008-09 from over 9 per cent in the previous three years.

Driven by stimulus packages provided by the government, the growth rate picked up to 7.4 per cent during 2009-10.