IMF: India needs to tighten monetary policy to counter inflation

International Monetary Fund (IMF) logo at the IMF headquarters building in Washington, US, October 2017. (Reuters pic)

NEW DELHI: India’s central bank will need to gradually tighten monetary policy further due to rising inflation, driven mainly driven by higher oil prices and a falling rupee, the International Monetary Fund said on Wednesday.

The Reserve Bank of India raised the repo rate for the second straight meeting last week by 25 basis points to 6.5%, while warning about the inflationary pressures.

The average inflation is likely to rise to 5.2% in 2018/2019 from a 17-year low of 3.6% in the previous fiscal year, the IMF said.

It said inflationary pressures were also exerted by a pick up in domestic demand and recent hike in procurement prices of major crops by the government, as it seeks to win support from farmers ahead of national elections next year.

India’s annual consumer inflation hit 5% in June, staying above the RBI’s medium-term 4% target for an eighth consecutive month.

“The RBI will need to gradually tighten policy further, in response to inflationary pressures, which will help to build monetary credibility,” the IMF said in its annual report.

The current account deficit is forecast to widen to 2.6% of gross domestic product in 2018/2019, from 1.9% in the previous year, due to higher oil prices and strong demand for imports.

The IMF projected global crude oil prices to average US$72 a barrel in 2018/2019, up from US$62 in its earlier forecast.

The report welcomed economic reforms undertaken by prime Minister Narendra Modi’s government, such as the introduction of a nationwide Goods and Services Tax (GST) and moves to allow more foreign investment in new sectors.

The report, prepared after consultations with government officials, also warned that India was at risk of a shortfall in tax revenue this year due to continued problems with implementation of GST and a delay in financial sector reforms.

It also forecast India’s economy could grow at 7.3% in the current fiscal year and 7.5% in 2019/2020.

Ranil Salgado, IMF mission chief for India said the economy was gaining momentum and the government should reinvigorate reform efforts to accelerate growth and create more jobs.

“This is critical in a country, where per capita income is about US$2,000, still well below that of other large emerging economies.”

As one of the of world’s fastest-growing economies – accounting for about 15% of global growth – Indian economy has helped lift millions out of poverty, the report said.