New Delhi, June 15, 2012 - Global financial services firm Moody's has said that the Indian economy is facing stagflation, where growth is slow and inflation high, and cautioned that the Reserve Bank can not be too aggressive in cutting interest rates.

“India's economy is in stagflation, with notably weaker growth but inflation still stubbornly high,” said Glenn Levine, Senior Economist, Moody's Analytics.

Amid wholesale price-based inflation ticking up to 7.5 per cent year-on-year in May due to supply-side factors, the agency said it would cause further ‘headaches' at the RBI.

“Yet, with the inflation numbers now being driven by supply side factors, and with the currency being pushed downwards...and India's weaker growth prospects, we think that the RBI could cut rates without it putting too much upward pressure on inflation,” said Moody's Analytics. However, it said the Reserve Bank of India could not be ‘too aggressive' while inflation remained a problem.

The RBI is scheduled to review mid-quarter monetary policy on June 18. Moody's said the recent plunge in the rupee was pushing up the price, especially imported goods and commodities priced in U.S. dollar.

It further said that with the rupee now sitting 15 per cent below its peak of late-February, this would ensure that WPI inflation remained in the 7-8 per cent range for another six months. “Indeed, with the growth side of the economy slowing, the risks have shifted sharply towards growth and they (the RBI and other policymakers) should just grin and bear the higher inflation numbers,” it added. Stagflation is a situation when economic growth of a country stagnates while inflation is rising.