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As a debate rages on policy rate revision, the International Monetary Fund (IMF) underlined on Friday that additional monetary tightening should be carefully calibrated. It also expressed concern on the rising inflation.
After concluding Article IV consultation for India, IMF said domestically, rising inflation can further dampen demand and impact vulnerable groups. On the upside, however, successful implementation of wide-ranging reforms or greater-than-expected dividends from the remarkable advances in digitalisation could increase India’s medium-term growth potential. It estimated GDP growth to be 6.8 per cent for FY23 and 6.1 per cent for FY24.
MPC divide
IMF’s remarks about rate revision come at a time when the monetary policy committee itself is not unanimous on rate hikes. This year, MPC has so far raised the policy rate by 2.25 per cent to 6.25 per cent. Another round of hike is expected in the next MPC meeting, scheduled in February.
However, there are growing concerns about tightening and its impact on growth. A member of MPC, Jayanth R Varma, in the last meeting said economic growth is now extremely fragile and definitely not robust enough to withstand excessive monetary tightening.
IMF on growth
The Fund said uncertainty around the outlook is high, with risks tilted to the downside. A sharp global slowdown in the near term would affect India through trade and financial channels. “Intensifying spillovers from the war in Ukraine can cause disruptions in the global food and energy markets, with significant impact on India. Over the medium term, reduced international cooperation can further disrupt trade and increase financial markets volatility,” it said.
The Fund noted that the economy has rebounded from the deep pandemic-related downturn. Growth has continued this fiscal, supported by a recovery in the labour market and increasing credit to the private sector... Policies are addressing new economic headwinds, including inflation pressures, tighter global financial conditions, the fallout from the Russia-Ukraine war and significantly slower growth in advanced economies. The authorities have responded with policy measures to support vulnerable groups and to mitigate the impact of high commodity prices on inflation, it said.
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