IMF calls for tightening of monetary policy in India
IMF maintains India’s growth forecast at 7.3% for 201819
NEW DELHI: The International Monetary Fund (IMF) on Tuesday called for further tightening of monetary policy in India to anchor expectations as inflation was expected to pick up.
The fund maintained India’s growth projection at 7.3% for 2018-19. “Monetary policy should be tightened to re-anchor expectations where inflation continues to be high (as recently done in Argentina), where it is increasing further in the wake of a sharp currency depreciation (Turkey), or where it is expected to pick up (India),” the IMF said in its bi-annual report.
After two successive rate hikes, the Reserve Bank of India’s (RBI’S) monetary policy committee (MPC) kept key policy rates unchanged on Friday, citing a benign inflation trajectory and downward revision to inflation projections. However, the stance was changed from neutral to “calibrated tightening”.
The IMF estimates inflation in India to rise from 3.6% in 2017-18 to 4.7% in 2018-19 amid accelerating demand and rising fuel prices. It said core inflation, excluding all food and energy items, in India
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had risen to about 6% as a result of a narrowing output gap and passthrough effects from higher energy prices and exchange rate depreciation.
The IMF said interest rates in advanced economies are expected to increase from the current still-accommodative levels, and with trade tensions rising, emerging market and developing economies required to be prepared for an environment of higher volatility. It said under floating exchange rate regimes, such as the one in India, foreign exchange interventions should be limited to addressing disorderly market conditions while protecting reserve buffers.
The IMF kept India’s growth forecast unchanged at 7.3% for 2018-19 from 6.7% in 2017-18. However, it revised India’s growth projection downward for 2019-20 by 10 basis points to 7.4%, citing the recent increase in oil prices and the tightening of global financial conditions.
“This acceleration reflects a rebound from transitory shocks (the currency exchange initiative and implementation of the national goods and services tax), with strengthening investment and robust private consumption. India’s medium-term growth prospects remain strong at 7.75%, benefiting from ongoing structural reforms, but have been marked down by just under 0.5 percentage point relative to the April 2018 WEO.”
The IMF praised the Narendra Modi government for implementing important reforms, including GST, the inflation-targeting framework, the Insolvency and Bankruptcy Code, and steps to liberalize foreign investment and making it easier to do business. “Looking ahead, renewed impetus to reform labour and land markets, along with further improvements to the business climate, are also crucial.”
In India, reform priorities included reviving bank credit and enhancing the efficiency of credit provision by accelerating the clean-up of bank and corporate balance sheets, and improving the governance of public sector banks, it added.
Meanwhile, the IMF cut its global economic growth forecasts for 2018 and 2019, saying that the Us-china trade war was taking a toll and emerging markets were struggling with tighter liquidity and capital outflows. The Fund said that it was predicting 3.7% global growth in both 2018 and 2019, down from its July forecast of 3.9% growth for both years.
(With agency inputs)