RBI raises hope, puts growth at 6.5 per cent

Mumbai: A day ahead of the review of its monetary policy on Tuesday, the central bank sharply raised its growth forecast for the country's economy to 6.5 per cent from its earlier projection of 5.7 per cent.

The Reserve Bank of India (RBI) said the revision was on account of positive outlook emanating from several sources, including the performance of core infrastructure industries, overall manufacturing output and robust showing by the services sector.

The forecast has been made in the first quarterly review of India's macro-economic and monetary development for this fiscal, a day ahead of the review of the central bank's monetary policy for 2009-10 by Governor D Subbarao.

"Eighth round of survey of professional forecasters, conducted by the Reserve Bank in June, placed overall (median) growth rate for 2009-10 at 6.5 percent, revised upwards from 5.7 percent in the earlier survey," the RBI said in a report.

The central bank said other indicators like increase in cement production, improved railway freight earnings and growth in new mobile connections during April-May were some more signs that the demand may be on the verge of a revival.

The recovery in stock markets and improved corporate earnings were also some indicators suggesting that the economy could be looking up.

However, the RBI also said a complete economic turnaround may still be distant and the positive signs seen were just early indicators given the delayed monsoons and persistence of the global economic recession.

"Lagged impact of the negative growth in manufacturing in the last quarter of 2008-09 on services demand, negative growth in capital goods, decline in the production of commercial vehicles, and an accelerated fall in import growth suggesting dampened demand conditions," the RBI report added.

It also said food prices were likely to move northwards given the feeble progress of monsoons and rise in minimum support price paid to farmers for their crops.

Inflation could also move into higher territory, the central bank said.

"There are indications of inflation firming up by the end of the year due to the waning base effect of last year, increase in commodity prices, delayed progress of monsoon potentially driving up food prices," it said.