NEW DELHI (Commodity Online) : Reserve Bank of India on Thursday said country’s deficient monsoon might affect the inflation outlook more than growth prospects.

In its annual report released here, the RBI said prolonged expansionary fiscal and monetary policies threatened to push up prices and eventually crimp growth.

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India's annual June-September monsoon rains, a key factor for the country's farm output and growth, are 25 percent below normal so far in 2009, and nearly half the country's districts have been declared drought areas.

While India's fiscal year runs from April to March, the central bank's accounting year runs from July to June.

Its warning tone on rising price pressures comes after many analysts have scaled down growth projections and pushed back their expectations for policy tightening further into 2010.

The Reserve Bank of India, in its annual report for 2008/09, did not specify when it thought policy accommodation should start to be withdrawn, but said if it was maintained for too long it could fuel inflation in the near term and constrain growth over the medium term.

Emerging signs of recovery are yet to indicate any clear trend, the central bank said. Returning to a high growth path at the earliest remained the key near-term policy challenge, it said.

The RBI said it faced a complex dilemma from the unpleasant combination of subdued growth alongside an emerging risk of high inflation.

"The emerging inflation outlook and the medium-term consequences of sustained accommodative monetary stance for inflation suggest that timing and pace of exit from the current accommodative policy stance would be a major challenge," the RBI's report said.

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