Wednesday, 28 September, 2022
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IMF wants tighter monetary policy but analysts divided over whether RBI will raise rates

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IMF report also says India is poised to grow at 7.4 per cent in FY 2018-19, thus making it one of the fastest growing economies in the world.

New Delhi: The International Monetary Fund (IMF) has suggested that the Reserve Bank of India adopt a tighter monetary policy but analysts are not too sure if the central bank will go ahead and raise rates in the near future.

“In India, given increased inflation pressure, monetary policy should maintain a tightening bias,” the IMF said in its Regional Economic Outlook: Asia Pacific for 2018, released Wednesday.

Teresa John, Economist at Nirmal Bang Institutional Equities, said that “It will not be very long before RBI raises rates, with Governor (Urjit) Patel holding the wild card.”

“The minutes of the April MPC meeting suggests that deputy governor Acharya will in all probability join ranks with Dr Michael Patra (RBI executive director) in voting for a rate hike in June,” John said.

In the RBI’s monetary policy committee (MPC) meeting last month, all members except Patra voted for status quo. He batted for a 25 basis point hike in repo rate – the rate at which RBI lends to the commercial banks –  saying that underlying macroeconomic developments impart some urgency to commencing the withdrawal of accommodation.

RBI deputy governor Viral Acharya also voted for a status quo. “I am, however, likely to shift decisively to vote for a beginning of withdrawal of accommodation in the next MPC meeting in June,” he said.

Devendra Pant, chief economist of India Ratings & Research, however thinks the RBI’s monetary policy committee (MPC) is unlikely to go for a rate hike in June.

“Chances are that they might adopt a more hawkish stance with high oil prices and rising bond yields,” he said.

“In the past 15 days, there has been no revision in petrol and diesel prices because of the Karnataka elections. So that will have some bearing on inflation,” Pant added.

He is of the view that there will be a big pause by the RBI for most of FY 19.

“But if the oil prices rise further and bond yields also shoot up, the RBI may go for a rate hike in the future,” Pant said.

In the April policy, RBI adopted a dovish policy stance by cutting the inflation forecast for the first half of this fiscal to 4.7-5.1 per cent from the previous projection of 5.1-5.6 per cent.

The IMF in its report said the medium-term CPI inflation is forecast to remain within RBI’s inflation-targeting band, but towards the higher side — 4 per cent ±2 per cent.

“Headline CPI inflation in April 2018 is likely to be slightly below the RBI’s 4.7-5.1 per cent target for first half of FY 19, yet we believe rising crude oil prices and core inflation will be concerns,” John said.

“We expect inflation average 5 per cent in FY19, about 100 bps above the RBI’s 4 per cent target,” she added.

Growth prospects of Indian economy

According to the IMF report, India is poised to grow at 7.4 per cent in FY 2018-19, thus making it one of the fastest growing economies in the world.

“In India, the economy is recovering from temporary disruptions from the November 2016 currency exchange initiative and the July 2017 rollout of the new Goods and Services Tax,” the report said.

“Medium-term growth prospects remain positive, benefiting from key structural reforms, including the landmark national GST reform,” the report added.

However, the current account deficit — a measurement of a country’s trade where the value of the goods and services it imports exceeds the value of the goods and services it exports — is expected to widen somewhat in FY2017-18 but should remain modest, financed by robust foreign direct investment inflows, the IMF report said.

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