Raise policy rate to contain inflation: IMF to Reserve Bank of India

Ahead of the Reserve Bank of India (RBI)'s monetary policy review on September 30, the International Monetary Fund (IMF) has suggested the central bank should raise its policy rate to counter "stubbornly high inflation".

Indian industry is, however, clamouring for a rate cut to boost industrial growth. Industrial growth declined to 0.5 per cent in June from 3.9 per cent in the previous month.

"Sustainably lowering inflation will require further increases in the policy rate," IMF said in a note to finance ministers and central bank governors of G20 countries, meetings between whom are underway in Australia.

Most economists have said RBI is likely to keep the policy rate intact, as upside risks to inflation are high. "At present, looking at the unfolding trajectory of CPI (Consumer Price Index) and WPI (Wholesale Price Index) inflation, we expect an extended pause on the repo rate (the rate at which banks borrow from RBI)," said Icra senior economist Aditi Nayar.

"One of the factors keeping retail inflation high is elevated and sticky food inflation, in which case monetary policy has a limited role to play," she added.

WPI-based inflation fell to a 58-month low of 3.74 per cent in August from 5.19 per cent in July; during the same period, CPI-based inflation declined from 7.96 per cent to 7.8 per cent. Between July and August, food inflation decreased to 5.15 per cent from 8.43 per cent in WPI terms, while retail food inflation rose from 9.36 per cent to 9.42 per cent.

RBI has set a target of eight per cent CPI-based inflation by January 2015 and six per cent by January 2016.