Growth easing to continue through second quarter: RBI

The Reserve Bank on Monday said growth moderation in the economy, that started in the last quarter of the past fiscal, will continue through the second quarter of the current fiscal, as monetary transmission effect has started taking firm root.

However, the central bank, in its Macroeconomic and Monetary Developments report released on eve of the first quarter credit policy on Tuesday, asserted "taming inflation warrants continuation of anti-inflationary monetary stance" and that growth can be sacrificed to achieve this objective.

"Notwithstanding the growth slowdown, high inflation requires continued anti-inflationary bias with a close watch and responsiveness to new information," the report said.

"Inflation risks stay, while growth showed signs of moderation. On current reckoning, growth is likely to stay around trend growth of around 8%. However, downside risks have increased. Overall, some moderation in growth is expected in 2011-12."

However, citing its Professional Forecasters' survey, the report notes that GDP growth may peter down by 30 basis points to 7.9% in the current fiscal.

It based its forecast on three factors, saying, "the baseline growth and inflation projections may arise from three factors - a significant departure of monsoon from normal; a collapse or re-build of global commodity price bubble; and the Eurozone debt crisis assuming full-blown proportions."

The report pointed to the rising inflationary expectations in the advanced economies saying this trend is challenging the fragile global recovery.

"Globally, the momentum of recovery appears to be stalling. High oil and commodity prices, the Middle East (West Asia) political strife, Japanese quake, sovereign debt problems in the Eurozone and the impasses on the fiscal and debt problems in the US have taken a toll on economic activity as well as consumer confidence," the report.

On domestic front, the RBI said growth showed some moderation in Q1 of 2011-12. These were visible from deceleration in IIP during April-May and in consumption of cement, steel and automobiles.

As a silver line amdist the rising dust of risks, the report said, "on balance, agricultural growth is expected to stay broadly on track on the back of almost normal monsoon." It noted that IIP growth, though having moderated, has turned more broad-based. Services sector has sustained its momentum.

"Going forward, there is a possibility of some softening in industrial growth."

The report noted the acceleration in IIP growth in 2010-11 was accompanied by more broad-based growth. The bottom 17 industries posted improved growth performance and their contribution to growth more than doubled.

"Growth showed signs of moderation in Q1 of 2011-12. Downside risks have increased as a result of forecast of sub-normal monsoon, global growth entering into a soft patch and persistence of high inflation."

"The services sector also maintained its momentum of growth, although its growth stayed below the pre-crisis rate. Going forward there could be some impact on growth from high input prices, high inflation and higher interest rates, but the economy is still likely to grow close to its trend."

Noting that core sector growth also moderated, mainly on account of a decline in natural gas and cement production and subdued growth in coal production, it said even auto sales moderated in Q1 of the current fiscal.