RBI should hike interest rates to bring down inflation: IMF

RBI should hike interest rates to bring down inflation: IMF

Sep 19,2014   10:22 Hrs IST

Little 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 increase its guard to fight against stubbornly high inflation by hiking its key policy rates so that inflation remains lower on sustainable basis. In a note released ahead of the G20 meeting of Finance Ministers and central bank governors at Cairns in Australia, IMF underscored that India needs to take more steps to reduce the large fiscal deficit and fight against stubbornly high inflation, which would warrant a hike in interest rates and a simpler monetary framework with clear objectives and operational autonomy for the central bank. Notably, right after the release of five year low August WPI data, Reserve Bank of India’s governor, Raghuram Rajan clearly had ruled out the chances of rate cut at the month-end monetary policy announcement, citing that Inflation in Asia's third-largest economy, India, was still high and hence there was no point in slashing interest rates since this would further build on to inflationary pressures. He then had underscored that Reserve Bank of India would bring down interest rates as and when it is “feasible”. Helped by slower annual rises in prices of fuel and clothes, retail inflation edged down marginally to 7.8% in August from 7.96% a month earlier. Meanwhile, extending its easing trend, India's main inflation gauge, based on monthly WPI, softened more than expected at 3.74% for the month of August, as compared to 5.19% (Provisional) for the previous month of July. Street widely was expecting a number above 4% for the month under review. Further, the international agency which also called for higher public spending on infrastructure to ease supply bottlenecks and support economic development, asserted that removing supply bottlenecks would lead to more sustainable growth. Separately, IMF, though acknowledging government’s stand on fiscal consolidation, flagged concerns over its quality and durability. The government has proposed to bring down the fiscal deficit to 4.1% of GDP in current year from 4.5% last fiscal and also has put up in place a fiscal consolidation roadmap as per which the fiscal deficit has to be brought down to 3% of the GDP by 2016-17.