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IMF favours further rate hikes to tame inflation

Our Bureau

New Delhi, Jan. 6

The International Monetary Fund (IMF) is in favour of further monetary tightening by the RBI to tame “elevated inflation”, which it sees as one of the near-term challenges confronting India in sustaining its high-growth momentum.

Noting that short-term real interest rates remain below historic norms and financing conditions have only hardened marginally, the IMF Executive Board has recommended “further steps to bring the real repo rate clearly into positive territory”.

This has been stated in the public information notice issued after the Executive Board discussions of Article IV consultations with India. Inflation has been one of the key themes of the 2010 Article IV consultations.

“We see room for further rate increase. But at the same time at what level and how much is something that has to be done gradually and looked at continuously and modulated as necessary. This is what the RBI has been doing. We welcome the steps taken so far by RBI in gradual way to increase interest rates. We expect RBI to continue doing that going forward,” Mr Sanjaya Panth, Senior Resident Representative, IMF, told a press conference on the outcome of Article IV consultations with India.

The IMF Executive Board had on December 22 last year concluded the Article IV consultation with India. Under Article IV of the IMF's Articles of Agreement, the IMF holds bilateral discussions with members, usually every year.

Mr Panth noted that the current projection of WPI-based inflation at 6.5 per cent for end-March this fiscal was higher than the current repo rate (6.25 per cent).

“There is no one measure of real interest rates. A good rule of thumb that we have been following is the inflation projection for WPI. For the end of current fiscal, it is projected at 6.5 per cent. To the extent, the current repo is below that it is clearly in negative territory. Does that mean just 0.25 per cent is good enough to bring into positive territory? I would not say that…. Clearly the fact that current projection of inflation is higher than the current repo rate does point to the fact that real rates are negative,” he said.

Meanwhile, Mr Panth said that IMF plans to undertake an assessment of the Indian financial sector in the second half of the current year. “The Indian authorities have requested IMF to carry out another Financial Sector Assessment Program, which could begin at the end of the year,” he said.

On the surge in capital inflows into India, Mr Panth said that IMF does not see the need for further capital controls and pointed out that India already has in place a very extensive system of capital controls. “With the current situation being where it is, we don't think India's absorptive capacity has been reached or exceeded. If and when that occurs, India already has the tools available to tweak things and modulate inflows,” he said.

IMF sees Indian economy growing by 8.8 per cent in 2010-11 and 8.1 per cent in the next fiscal.

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IMF lifts India growth forecast to 9.4% in 2010
More flexibility in IMF's lending practices?

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