IMF says India needs to tighten monetary policy to counter inflation

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

The Reserve Bank of India (RBI) 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 2018/19 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 2018/19, from 1.9% in the previous year, due to higher oil prices and strong demand for imports.

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. – Reuters