High inflation and the consequential policy rate increases are likely to impact domestic growth in the future, said the Reserve Bank of India (RBI) in its Financial Stability Report. A slowdown in investment demand and the slackening global recovery also pose downside risks to growth.
The central bank said inflation was likely to remain high, as the entire impact of the rise in oil and coal prices was yet to be felt. The government's higher expenditure on subsidy and rise in wages and raw material prices would prevent inflation from declining.
Growth is likely to be moderate, while inflation remain firm due to rising commodity prices, RBI said in the report. Rising commodity prices are expected to have an adverse impact on the fiscal consolidation process, it said, adding there were risks to the fiscal deficit projections of 2011-12.