IMF backs RBI's monetary tightening policy ahead of policy review

NEW DELHI: The International Monetary Fund has endorsed the current monetary tightening in India ahead of the policy review by the Reserve Bank of India on October 25, providing a counter to the rising chorus of demand for a pause in interest rate hikes.

In countries such as China, India and Korea where inflation remains above target, and inflation expectations have continued to rise, the current pace of monetary tightening remains appropriate, the IMF said in its Regional Economic Outlook for Asia Pacific released on Thursday.

The RBI has raised rates 12 times over the last eighteen months by a total of 350 basis points to tame the rapid rise in inflation. Headline inflation for August was 9.8% while latest numbers show food inflation at 9.3% for the week ended October 1.

The IMF notes that core inflation has increased in Hong Kong, India, Indonesia, Korea, Malaysia, and Thailand, because of the second-round effects of previous commodity price rises have resulted in generalized inflationary pressures.

The multilateral lender has pared Asia's growth forecast by half a percentage point to 6.25% in 2011 from April 2011 forecast, blaming it on the deteriorating exports outlook in advanced economies because of the eurozone debt crisis and a slowdown in the United States. It has suggested that Asia has not "decoupled" from advanced economies and therefore needs to focus more on domestic growth.

The impact will be less for domestic demand-led economies such as India, the fund notes.

It has upheld its September growth forecast of 7.8% for 2011 and 7.5% in 2012 for India, but warned that corporate funding in India could be hit if the European crisis worsens.

"In India, where corporate funding relies increasingly on external commercial borrowing and equity finance, a severe fall in investment would severely curtail growth," the report said.

"The panic sell-offs across Asian financial markets and safe-haven flows into Japan that occurred when European troubles intensified in August September 2011 demonstrate that there is 'no place to hide' when advanced markets come under pressure," the IMF said. It has also pointed out that in many economies including India the fiscal deficits in 2012 are likely to remain 1-2.5 percentage points above the pre-crisis levels.

It also indicated that high growth was not having adequate affect in reducing poverty in India. A one percent increase in real per capita income leads to about a 2% decline in the poverty headcount, the IMF said.

Source: EconomicTimes