MUMBAI: The International Monetary Fund (IMF) on Tuesday batted for higher policy rates in India, anticipating a rise in inflation. The IMF’s remarks come days after the RBI chose not to raise rates, though it changed the stance from neutral to calibrated tightening.
“Monetary policy should be tightened to re-anchor expectations where inflation continues to be high, where it is increasing further in the wake of a sharp currency depreciation, or where it is expected to pick up,” IMF said in its biannual World Economic Outlook report. The multilateral agency estimates inflation may rise from 3.6 per cent in FY18 to 4.7 per cent, due to accelerating demand and rising fuel prices.
Reasoning that interest rates in advanced economies could increase and amid rising trade tensions, emerging market and developing economies needed to be prepared for an environment of higher volatility.
“Monetary policy in emerging market economies will need to manage the trade-off between supporting activities should external financial conditions tighten further, and keeping inflation expectations anchored,” IMF noted, adding that under floating exchange rate regimes like India, forex interventions should be limited to address disorderly market conditions while protecting reserve buffers.
Meanwhile, IMF retained its India GDP growth projections unchanged at 7.3 per cent for FY19, but revised it downwards for FY20 by 10 bps to 7.4 per cent, primarily due to rising crude prices and tightening global financial situation.
“This acceleration reflects a rebound from transitory shocks (the currency exchange initiative and implementation of GST), with strengthening investment and robust private consumption. India’s medium-term growth prospects remain strong at 7.75 per cent, benefiting from ongoing structural reform, but have been marked down by just under 0.5 percentage point relative to the April 2018 WEO,” it said.
Reforms priority
IMF listed reviving bank credit, enhancing the efficiency of credit provision by accelerating the twin balance sheet clean-up exercise and improving the governance of PSBs as priorities. “A higher interest burden and risks from rising yields require continued focus on debt reduction to establish policy credibility and build buffers,” it said.