RBI projected 5-5.5 per cent inflation for this fiscal, but admitted that reining in inflation will continue to pose a challenge to monetary policy due to volatile oil prices.
"GDP growth may be placed in the range of 7.5-8 per cent during 2006-07 assuming accelerated growth in agriculture under normal monsoon conditions and barring domestic or external shocks," RBI said in its Annual Policy Statement for 2006-07.
Though the forecast for South West monsoon is yet to be released, RBI has anticipated a normal monsoon, which if turns out true, would accelerate farm sector growth rate.
"Despite some uncertainties, the overall industrial outlook continues to be positive. Services sector growth is expected to sustain the momentum," it said.
The Monetary and Credit Policy 2006-2007
RBI happily noted that its forecast of 7.5-8 per cent GDP growth was in line with the advanced estimate of Central Statistical Organisation, which has pegged economy to grow by 8.1 per cent in 2005-06, up from 7.5 per cent in 2004-05.
In the policy announced on Tuesday, the central bank did not tinker with bank rate, repo and reverse repo rates and cash reserve ratio.
RBI said monetary policy would aim to ensure a monetary and interest rate environment that enables continuation of growth momentum consistent with price stability.
"The policy endeavour would be to contain the year-on-year inflation rate for 2006-07 in the range of 5-5.5 per cent," it said.