Indicating that a cut in interest rate is likely, the Reserve Bank of India (RBI) has said despite high inflation it would take steps to support growth in the half-yearly review of monetary policy tomorrow.
"Monetary policy needs to be cautious in the interim, focusing on inflation while using the available space to support growth to the degree it can," RBI said in its macroeconomic and monetary development review.
RBI said the Survey of Professional Forecasters has lowered the GDP growth projection to 5.7 per cent from 6.5 per cent for the current fiscal. Average wholesale price based inflation forecast is revised upwards to 7.7 per cent from 7.3 per cent.
It said the global growth prospects, both in advanced and emerging economies, have weakened and the euro zone troubles have affected business confidence and caused deceleration in global trade.
"Risks of spillovers from global financial markets remain. Unconventional monetary policies have transitorily moderated uncertainties, but the underlying stress has not diminished with incomplete deleveraging and unfinished financial sector reforms," RBI said.
It said sustaining the reform initiatives of the government would be the precursor for a turnaround in economic activity.
The government has in the recent past undertaken a host of reform initiatives including hiking diesel prices by over Rs 5 a litre and foreign investment norms for retail, pension, insurance, information and broadcasting sector.
RBI said aggregate demand is weakening, led by the investment slowdown. However, persistent high core inflation remains a cause of concern.
In its last policy review, RBI held interest unchanged, though it had lowered CRR by 0.25 per cent to infuse Rs 17,000 crore liquidity into the system.
The RBI said the recent spate of reform measures have helped in arresting the downfall in growth, but called for a greater coordination between different government agencies and removal of structural bottlenecks on infrastructure as the key factors for revival.
"It is necessary to remove the pending constraints in the power, coal and road sectors at the earliest ... Fiscal consolidation and removal of impediments to infrastructure investments hold the key to growth revival," RBI said.
It said there would be fiscal slippages during the year, beyond the budgeted 5.1 percent deficit, and that the final number may not be better than last fiscal's 5.8 per cent.
Earlier in the day Finance Minister P Chidambaram had unveiled a five year roadmap for fiscal consolidation pegging the fiscal deficit for the current fiscal at 5.3 per cent