RBI may need to raise rates to tame inflation: IMF

The International Monetary Fund (IMF) today said India might need to increase policy rates to contain inflation. It also predicted India’s gross domestic product (GDP) growth to moderate to 8 per cent next year (2011-12), while this year (2010-11) the economy might grow at 8.75 per cent.

IMF executive directors, after bilateral discussions with their member countries, noted that short-term real interest rates remained below historic norms in India and financing conditions had hardened only marginally. In their report on the Indian economy, most directors at the multilateral lending agency identified inflation as a major area of concern and recommended further steps to “bring the real repo rate clearly into positive territory”.

RBI has increased rates six times in the last one year.

“We see room for further rate increase, but at the same time, it has to be done gradually and needs to be looked at continuously,” senior resident representative of the IMF, Sanjaya Panth, told reporters.

Wholesale food inflation rose to a yearly high of 18.32 per cent for the week ended December 25. The overall inflation was 7.48 per cent in November. IMF said it could moderate to 6.5 per cent by March-end.

The report said the growth this year would be driven by rebound in agriculture after seeing last year’s drought, the pick-up in private consumption as employment prospects have improved and continued rise in disposable income of the people. Last year, the economy had recorded 7.4 per cent growth. It expanded by 8.9 per cent in the first half of the current financial year (2010-11).

The IMF’s projections for next year are lower than the government’s forecast of 9 per cent. However, for this year India has also projected a growth rate of 8.75 per cent, with a variation of 0.35 per cent on either side.

“Risks to growth are broadly balanced with downside risks relating mainly to the global economy. Surging capital inflows could further spur investment but could complicate macroeconomic management,” the report added.

Panth said current inflows were in a comfortable zone and there was no need for capital control, but inflows could increase absorptive capacity in future.

The IMF also said India’s current account deficit was projected to reach 3.3 per cent of the GDP in 2010-11 and 3.5 per cent next year. It has projected India’s gross savings rate at 34.4 per cent and gross investment at 37.7 per cent of the GDP. It sees India’s merchandise exports at $229.4 billion in 2010-11, up 25.9 per cent from a year ago and imports at $380.6 billion, up 27.1 per cent.