In an otherwise gloomy environment, the Reserve Bank of India today appeared a tad bullish on the prospects of growth during the current financial year.

In its annual report for 2007-08, released today, RBI pointed to the grim global situation, higher risks to inflation “that appear to be persistent” and said there is fiscal pressure, both at the Centre and at the state level.

At the same time, it said that the Indian economy is expected to witness a slight moderation in the growth, which continues at an elevated level.

While maintaining that the pressure on the oil and food price front has not completely eased, it added, “Given the current structure of the Indian economy, whereby services constitute the predominant share of GDP, the adverse impact of fuel price pass-through on the GDP (gross domestic product) growth in India may be somewhat lower relative to other EMEs (emerging market economies).”

Last month, RBI had lowered its GDP growth forecast for the year to 8 per cent, even as the other agencies such as the PM’s economic advisory council are not so bullish. During the first quarter, the economy is estimated to have grown 7.9 per cent.

On inflation, the report said a realistic endeavour would be to lower it from over 12.5 per cent to close to 7 per cent by March 2009.

It also said that the high prices of crude oil, gas and coal will put pressure on coal and electricity prices. Metal prices provide the only good news, while edible oil and iron and steel may cost more.

The surge in inflation also indicates more pressures on domestic demand, growth in monetary aggregates above the indicative policy trajectory, rise in incremental non-food credit-deposit ratio of banks and evolving fiscal situation.

Despite a series of monetary tightening measures, bank credit rose 26 per cent up to August 15, as against 20 per cent being targeted by RBI. Similarly, deposits rose 22 per cent, compared with the RBI target of 17 per cent.

The central bank also advised caution on bad debt. “In conjunction with the interest rate cycles, the banking system need to be vigilant to future non-performing assets (NPAs) and the US-like sub-prime woes.

In addition to pressure from higher subsidies, RBI once again warned of the adverse fiscal impact due to the Rs 66,600 crore farm debt waiver and the Sixth Pay Commission award. For the states there was another warning bell in the form of lower devolution of central taxes due to a cut in the excise and Customs duty on petroleum products.