The International Monetary Fund on Thursday has recommended India to go for interest rate hikes. It has also revised its previous forecast upwards to a 4.6 per cent GDP growth in FY14, which would improve to 5.4 per cent in FY15.
The annual Article IV consultation report that is issued by the IMF for each of its member country says, “High and persistent inflation is a key macroeconomic challenge facing India. Further increases in the policy rate will be necessary to tackle high inflation and its expectations.”
The report comes just ahead of the spring meeting of IMF. It says that India has been able to shore up its growth and revive investor sentiments since July last year. No further policy changes are assumed in the baseline, but slightly stronger global growth, improving export competitiveness, a favorable monsoon, and a confidence boost from recent policy actions should deliver a modest growth rebound in the near term, the report adds.
While the new growth estimate is higher than the IMF’s previous forecast of 3.75 per cent in the current fiscal and 5.1 per cent in the next fiscal, India is more optimistic about economic recovery. The Interim Budget 2014-15 has estimated the economy to grow at 4.9 per cent this fiscal and at least 6 per cent in FY15.
The IMF’s report, which is based on discussions with finance ministry and the Reserve Bank of India officials in November last year, however, warned that fiscal restrained and high interest rates could slow down growth.
“India’s trend growth is currently estimated at around 5.5 percent but is expected to rise to its medium-term growth potential of around 6.75 per cent (under current policies) as unblocked investments are implemented and global growth improves,” it said.
The IMF has also warned of double digit retail inflation while wholesale price index based inflation will remain above the RBI’s comfort zone.
The agency has called for structural reforms to reduce supply bottlenecks, bolster employment growth, improve medium-term growth and reduce poverty.