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RBI needs to gradually tighten monetary policy: IMF

Press Trust of India  |  New Delhi 

The needs to gradually tighten in view of inflationary pressure due to higher oil prices, increase in Khariff MSP and possible fiscal slippages, the (IMF) said today.

The report comes within days of the RBI raising benchmark short term lending rate (repo) by 25 basis points to 6.5 per cent citing inflationary concerns. It was the second such hike in a row.

The IMF said the tightening in early June was appropriate and further gradual tightening will be needed.

"The RBI will need to gradually tighten policy further, in response to pressures, which will help to build credibility," the report said.

It noted that headline and core are rising and forecast to be above the mid-point of the headline target band in the near and medium term, raising the probability that adverse shocks could push headline inflation above the RBI's target range (4 per cent, +, - 2 per cent) and calling for a tighter stance.

With demand recovering and rising oil prices, medium-term headline inflation has risen to 4.9 per cent in May 2018, above the mid-point of the RBI's headline inflation target band, said the Washington-headquartered multilateral lending agency.

As per the IMF, inflation risks are tilted to the upside including from higher oil prices, potential changes to minimum support prices (MSPs), exchange rate depreciation, possible fiscal slippages, second-round effects from state-level increases in HRAs, and recently-announced increased import duties.

"Tighter monetary policy will, however, make it more challenging to revive the credit cycle," it said.

The IMF further said that to enable the RBI to achieve the medium-term inflation target on a sustained basis continued action to improve the monetary transmission mechanism is needed.

Having established a robust institutional framework for monetary policy, key next steps include enhancing competition in the system, encouraging banks to streamline credit pricing, addressing fragmentation of interbank markets, and continuing to enhance communication, it added.

(This story has not been edited by Business Standard staff and is auto-generated from a syndicated feed.)

First Published: Wed, August 08 2018. 16:05 IST
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