The Reserve Bank of India (RBI) on Monday stated that the overall economic outlook is a mixture of upside prospects of recovery and downside risks.

However, “anchoring inflation expectations in the face of sustained high inflation in essential commodities will be a key challenge,” the RBI noted.

“Managing the trade-off between supporting growth and reining in inflation expectations poses a complex policy challenge,” it stated on the eve of the review of the second quarter of its annual policy 2009-10.

The sharp decline in headline wholesale price index (WPI) inflation from its peak level of 12.9 per cent in August 2008 had created “the space for adoption of growth-supportive accommodative monetary policy to mitigate the impact of the global crisis.” “From the stand point of monetary policy, anchoring inflation expectations in the face of sustained high inflation in essential commodities will be a key challenge,” the RBI stated.

The current growth outlook for 2009-10 has both upside prospects as well as downside risks. Upside prospects to growth include the impact of growth supportive fiscal-monetary policy stance, recovery in industrial production and core infrastructure sector, significant upturn in overall business confidence as per different surveys, strong recovery in the stock market with higher mobilisation of resources, return of capital inflows and improving outlook for the global economy which could boost the sluggish consumer and investor confidence.

The downside risks include the unexpectedly large deceleration in private consumption demand and some decline in corporate sales in the first quarter of 2009-10, the impact of deficient monsoon and recent flood in certain parts of the country on agricultural output and rural demand, sustained deceleration in credit growth and decline in exports.

The Reserve Bank’s professional forecasters’ survey points to downward revision to the growth outlook from 6.5 per cent to six per cent in 2009-10.

“Inflation outlook is currently driven by the emerging signs of inflationary pressures, even though certain developments could neutralise the pressures,” the RBI stated. These include sluggish aggregate demand and negative output-gap, stabilisation of oil prices in the last few months, notwithstanding the increase in October, adequate buffer stocks of foodgrains and the prospects of a better rabi crop.

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