IMF welcomes Indian inflation progress, but RBI should ‘stand ready’

The International Monetary Fund has welcomed the adoption of an inflation-targeting regime in India, while advising the central bank to “stand ready” to tighten monetary policy, should inflationary pressure “gather pace” over the coming year.

Following the IMF’s latest Article IV consultation, published on March 2, fund staff said the regime “provides a robust institutional foundation for maintaining price stability”.

Monetary conditions, they said, remain “consistent” with achieving the Reserve Bank of India’s (RBI) inflation target of 5% by March 2017. This appears to be supported by global developments.

“The collapse in global oil prices is a large windfall gain for India,” said Paul Cashin, head of the IMF team for India. “[It] has made room for more spending on goods and services, helped improve the external and fiscal positions, and allowed a sharp decline in inflation.”

Annual CPI declined to 5.6% in December 2015, down from an average of 10% during 2009–2013, reflecting economic slack and an appropriate monetary policy stance at the RBI.

However, given the “upside risks” to inflation and “high household inflation expectations”, both staff and the executive board encouraged the central bank to “stand ready” to tighten, if “warranted”.

High household inflation and a large fiscal deficit remain a “key macroeconomic challenge” for India, resulting in “limited” policy space to support growth, staff noted.

To keep inflation low in the future, the staff recommended supporting the new monetary policy framework with a “sustainable medium-term fiscal consolidation strategy”.

India’s fiscal consolidation “road map” was delayed by a year, but the new road map proposed to achieve a central government fiscal deficit of 3% of GDP by 2017–2018, rather than 2016–2017, is under way. Staff also made the case for “durable” supply-side measures.

India is expected to experience growth of 7.5% throughout the 2016–2017 fiscal year, up from 7.3% this year, staff said.

To ensure the “durability” of the Indian “growth recovery”, Cashin stressed the need to increase the capital buffers in public banks and implement governance reforms “along with the new bankruptcy law”.