The global economy seems to be headed for another downturn after just three years. The recovery is likely to lose traction due to the continuing euro area debt crisis,” RBI Governor D. Subbarao said in a statement.

Reserve Bank of India Governor D. Subbarao said in a statement that just after three years, the global economy is heading for another downturn mainly because of euro zone debt crisis that would also pull down India's growth.  “The global economy seems to be headed for another downturn after just three years. The recovery is likely to lose traction due to the continuing euro area debt crisis,” he added soon after presenting the third quarter review of the monetary policy for 2011-12. “As fiscal austerity progresses, the euro area could enter into a recession. With growth decelerating even in emerging and developing economies, the spillovers from euro area are likely to pull down global growth,” he said.  After contracting by 2.4 percent in 2009, the global economy registered a growth of 4 percent in 2010 and is estimated to grow by 2.8 percent in 2011, according to the United Nations' economic department data.  The ongoing crisis in the euro zone region has pulled down growth in 2011, and according to the RBI the situation is likely to worsen further. Indian policymakers have also blamed euro zone crisis for deceleration in GDP and industrial growth.

India's GDP growth fell to 7.3 percent in the first half of the current financial year as against the budgetary target of around 9 percent.  The situation worsened in the third quarter with industrial output contracting by 4.74 percent in October. However, the factory output rebounded in November and registered a growth of 5.9 percent.  The RBI said commodities prices, including oil price, were likely to soften in 2012-13 because of weak global growth.  However, the central bank warned that the upside risks for oil price remain, including from recent geo-political uncertainty.  “An adverse feedback loop between bank and sovereign debt brought euro area closer to contagion across the region. Tightening credit conditions, rising risk premia, deleveraging, weakening growth in the euro area are keeping global financial markets under stress,” the RBI said.