RBI's top priority: Inflation or industrial growth?

Inflation would remain the number one enemy for the Reserve Bank of India. A survey of economists also expects overall gross domestic product or GDP to slow down to below 8 percent. It appears that the central bank is left with no choice but to opt for slower growth in a bid to tame the inflation menace.That’s a clear message the FICCI Economic Outlook Survey for July gives out.

The RBI is divided between the inflation figures nearing double digits and the slowing industrial growth numbers. And the survey says, it should and will try and reign in inflation further despite possibilities of a global slowdown emerging stronger.

[caption id=“attachment_48066” align=“alignleft” width=“380” caption=“The RBI is divided between the inflation figures nearing double digits and the slowing industrial growth numbers. Reuters”]  [/caption]

Majority of the 13 economists and financial analysts who were surveyed by FICCI for the outlook, expect headline inflation to hit the double-digit mark in June when final numbers are announced. There is a strong consensus on the possibility of it staying above 9 percent till November this year. Therefore, majority of the respondents expect RBI to continue with its focus on managing inflationary concerns. And they feel RBI will impose a 25 basis points (1 percent is equal to 100 basis points) hike in the policy rates on Tuesday.

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Though the RBI could be nearing the end of tightening, the survey says, don’t expect the central bank to give any hints of that when the inflation could well be in double digits when it starts capturing the full effect of the fuel price hike. The inflation rate could well be above 9 percent till November this year.

For economic forecasts for the year, GDP growth is expected to be 7.9 percent, varying slightly from 8 percent in last month’s survey. While projected growth for agriculture has gone up from 3.7 to 3.8 percent and for services sector from 9.2 to 9.4 percent when compared to the last survey, estimates for industry have slipped. While in the previous survey (May 2011), the survey participants had projected industry to grow by 8 percent in 2011-12, in the present survey this figure stands at 7.3 percent. The fiscal deficit numbers remain tight at 5.1 percent of GDP this fiscal year. The forecast for fiscal deficit ranges between 4.8 percent and 7.0 percent.

Here are the major consensus numbers that emerged from the survey conducted between 7 and 19 July :

• GDP growth - 7.8 percent (Q1, 2011-12), 7.8 percent (Q2, 2011-12)

• Agriculture and allied activities growth - 4.5 percent (Q1, 2011-12), 4.5 percent (Q2, 2011-12)

• Industry growth - 6.9 percent (Q1, 2011-12), 7.2 percent (Q2, 2011-12)

• Services growth - 8.8 percent (Q1, 2011-12), 9.1 percent (Q2, 2011-12)

• WPI inflation rate - 9.7 percent (Q2, 2011-12)

• IIP growth - 6.1 percent (Q1, 2011-12), 7.4 percent (Q2, 2011-12)

• Trade Balance - (-) 7.2 percent (Q1, 2011-12), (-) 7.6 percent (Q2, 2011-12)

• Current Account Balance - (-) 3.1 percent (Q1, 2011-12), (-) 4.0 percent (Q2, 2011-12)

• USD / INR exchange rate - Rs 44.3/USD (Q2, 2011-12)