India's retail sector faces a "bit cloudy" outlook due slow growth along with persistent

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inflation and the government's decision to hold back FDI in multi-brand segment, according to a report by Deloitte Touche Tohmatsu Ltd (DTTL).

'The 2012 Global Powers of Retailing' report by the consulting firm, DTTL suggests that retailers will, however, find some silver linings as softening commodity prices will help in improved profit margins.

"The outlook for India (retail sector) is a bit cloudy as the economy is clearly slowing, following a period in which monetary policy was tightened to fight inflation...It did not bring the inflation down," the report said.

Commenting on the findings, Rajan Divekar Senior Director Deloitte in India said: "...Given the recent policy flip-flop related to FDI in multi-brand retail, both global retailers as well as existing Indian organised sector retailers appear to have adopted a cautious 'wait and watch' approach before committing fresh investments."

He, however, said the Indian retail sector offers significant potential for growth of modern trade.

India also has a set of obstacles that includes a high degree of trade protection, continuing regulation of labour markets and uncertainty regarding the future of the FDI policy related to multi-brand retail, it said.

Meanwhile, Indian retailers are customising and fine tuning their business models across retail formats to ensure that there is a balance between store expansion and profitability, Divekar said.

"The recent liberalisation permitting 100 per cent in single brand retail is a welcome sign especially for select luxury/niche retailers," he added.

The report, however, said one positive effect of slower global growth will be the continued dampening of commodity prices.

"For retailers, this means some improvement on the cost side of the ledger while retail price inflation in some economies presents an opportunity for improved profit margins, even in the context of slow top-line growth," it said.

Revival of the proposal to permit 51 per cent FDI in multi-brand retail could bring in a positive impact on the retail sector as well as the Indian Economy, it added.