RBI needs to gradually tighten monetary policy to counter inflation: IMF

Average inflation likely to rise to 5.2% in 2018-19 from a 17-year low of 3.6% in 2017-18, according to the International Monetary Fund.

The Reserve Bank of India (RBI) 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 on Wednesday. The central bank raised the repo rate for the second straight meeting last week by 25 basis points to 6.5 percent, 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 financial year, the IMF 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, it added.

Consumer price index-based inflation hit 5% in June, staying above the RBI’s medium-term 4% target for the 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 GDP in 2018-19, 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 $72 a barrel in 2018-19, up from $62 in its earlier forecast.

The report welcomed economic reforms undertaken by the government, such as the introduction of the 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 an economic growth of 7.3% in the current fiscal year and 7.5% in 2019-20.

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 $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, the Indian economy has helped lift millions out of poverty, the report said.