IMF Upbeat on India Growth
By JAMES GLYNN
SYDNEY -- An upbeat assessment of India's growth outlook from the International Monetary Fund, coupled with a warning on the need to anchor inflation expectations, is likely to lend weight to market expectations for near-term monetary tightening by the country's central bank.
The IMF in its latest Article IV consultation paper issued Wednesday said India's economy is recovering well, with conditions now in place for a gradual tightening of monetary policy. It also indicated there is room for the rupee to rise without compromising a recovery.
"India's economy is rebounding strongly ahead of most countries in the world, bringing policy trade-offs to a head earlier than in other countries," the IMF said.
The comments highlight the dilemma for policy makers in India as they confront an economy picking up steam with inflation pressures starting to build, at a time the country's fiscal position remains weak.
Economists increasingly expect the Reserve Bank of India to become more aggressive in tightening policy, possibly raising interest rates at its next meeting in April. At its most recent meeting at the end of January, the RBI left lending and borrowing rates on hold but increased the cash reserve requirement for banks by 0.75 percentage point.
The process of tightening macro-economic policy settings should start with monetary policy, the IMF said.
"Moving early would also mitigate the risk of inflation expectations becoming unmoored, and thus would require a smaller overall adjustment. Initial steps could be to sequester most of the excess liquidity through increases in the cash reserve ratio," it added.
The IMF forecasts India's economic growth to accelerate to 8.0% in 2010-11 from 6.75% in 2009-10. That compares with the government's forecast for growth in 2010-11 of 8.5%.
"With India's long-term prospects remaining strong and private sector balance sheets sound, we expect growth to be back at potential in 2010-11 even if advanced economies grow below trend," the agency said.
Allowing the rupee to gain would not necessarily result in reduced competitiveness, it added. The rupee is up 1.9% against the U.S. dollar since the start of the year, and some analysts believe the central bank may step up intervention to slow the rise and protect exporters, in line with similar moves elsewhere in Asia.
"Given low interest rates in advanced economies and India's high relative growth, capital inflows are likely to be substantial. With the rupee still below its 2008 peak, there would be room for appreciation without concerns about eroding competitiveness," it said.
Other policy options, especially prudential measures, may be appropriate if asset price bubbles are a threat, it added. However, straightforward capital controls should be used "only as a last resort," given India's dependence on foreign inflows to sustain investment.
The IMF also said it was concerned about rising inflation in the food sector. That comes after inflation in February sped up to just shy of a double-digit rate. The benchmark wholesale price index-based inflation rate rose to 9.89% on year, its fastest pace in 16 months, from a provisional 8.56% in January, putting inflation well above a 8.50% rate that the RBI has forecast by the end of March.
The IMF did sound a warning note about the country's fiscal health, calling for a reduction in India's 2010-11 budget deficit.
"With the recovery becoming entrenched and India's high debt, the risk of premature withdrawal of fiscal stimulus is low. Introducing reforms to underpin lasting consolidation will be of paramount importance," it said.
IMF Upbeat on India Growth - WSJ.com
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