The Reserve Bank has 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 percent in 2011-12, lower than 8.5 percent 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 on Thursday.

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 percent.

“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 percent as against 9.6 percent 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.

Economic growth could decline to 8 pc this fiscal: RBI

The Reserve Bank on Thursday said the country’s economic growth could moderate to 8 percent during the current fiscal from 8.5 percent recorded a year ago due to unfavourable developments.

“On current reckoning, real GDP growth is expected to moderate to around 8 per cent in 2011-12 from 8.5 per cent in 2010-11,” RBI said in its annual report for 2010-11.

Growth prospects for the year 2011-12 seem to be relatively subdued compared to the previous year due to a number of unfavourable developments, it said.

“Global uncertainties have increased. If global financial problems amplify and slows down global growth markedly, it would impart a downward bias to the growth projection,” it said.

Besides, high food and non-food commodity price inflation pose risk to growth, the central bank said.

The global oil and commodity prices, even after some correction, remain high and could adversely impact growth.

Persistent inflationary pressures, rising input costs, rise in cost of capital due to monetary tightening and slow project execution are some of the factors that are weighing on growth, it said.

While the prospect for the farm sector looks encouraging with the normal south-west monsoon so far, industrial sector growth is likely to decelerate due to above mentioned factors, it added.

The growth of the services sector will be driven by the unfolding of the global and domestic economic situation, but is largely expected to keep its momentum.

It is expected that the robustness of the services sector, which accounts for more than 65 percent of GDP, would continue to support the growth process, it said.

From the demand side, it said moderation is expected as investment may remain soft in the near-term, while private consumption may decelerate.

In face of moderating demand, expenditure-switching from government consumption expenditures to public investments would help, the report said.