Inflation risks could rise in 2013-14 even though headline inflation fell to a 36-month low in December as diesel price deregulation and prospects of a weakening rupee due to an uncomfortably high current account deficit drive up prices in the economy, according to the Reserve Bank of India.
In the RBI's survey, professional forecasters have raised the projection of average inflation for 2013-14 to 7.0% from 6.7% earlier. The RBI, too, noted that the high current account deficit could slow the pace of the fall in inflation going ahead. Further, inflation expectations have shown a marginal increase during October-December period, the RBI said in its macroeconomic and monetary developments report.
Even though core inflation has eased markedly, a close eye on cost-push inflation and wage price spiral is needed, the central bank said.
The RBI has projected inflation to be around 7.5% by March end. Meanwhile, despite a series of reforms since September, business sentiment and growth prospects have not improved significantly, the RBI said.
In fact, professional forecasters have cut the GDP growth rate for 2012-13 to 5.5% from 5.6%, which is lower than the RBI's projection of 5.8%. According to forecasters, both industrial and services growth will slow further to 2.8% and 5.4%, respectively, for the current financial year.
Moreover, economists expect a slower recovery than before in 2013-14. Forecasters have slashed their GDP growth projection of 2013-14 to 6.5% from 6.6% with industry growing at just 4.7% and services by 7.8%. Growth could recover in the next financial year on the back of the recent reforms announced by the government, such as more foreign direct investment in key sectors, calibrated hikes in diesel prices and reduction in expenditure, the RBI said.