The Indian economy is recovering faster than expected and may emerge from the contraction phase to post a 0.1 per cent growth rate in the October-December quarter, according to an RBI report released on Thursday.

However, at the same time the central bank sees rising inflation as a headwind that needs to be reined in so that it doesn’t hurt the incipient growth impulses.

“The Indian economy is pulling out of Covid-19’s deep abyss and is reflating at a pace that beats most predictions," the report said.

“Contractions forecast by various agencies for the year as a whole are being trimmed, and if the current momentum is maintained, the bounce back expected in the last quarter of the year may be stronger than postulated under baseline assumptions," the RBI said.

During the Covid-19 pandemic, financial savings of households and corporations have risen. With economic activities turning around, bank credit is slowly gaining traction, it points out.

Therefore, with the policy emphasis now shifting towards the more durable drivers of the economy, private investment should turn its focus away from precautionary and deleveraging considerations “to capex, capacity utilisation and building of new capacities," the report said.

The return of demand, though, is fuelling inflation. “A combination of rising international commodity prices and increasing pass-through to domestic manufactured goods and services prices, firms striving to recoup lost incomes by raising margins, and demand normalising is adding to core inflation pressures," the RBI said..