RBI will need to keep raising policy interest rate - IMF

MUMBAI Fri Feb 21, 2014 11:02am IST

1 of 2. The Reserve Bank of India (RBI) seal is pictured on a gate outside the RBI headquarters in Mumbai October 29, 2013.

Credit: Reuters/Danish Siddiqui/Files

Related Topics

MUMBAI (Reuters) - The Reserve Bank of India will need to continue raising its policy interest rate given the sticky nature of inflation, the International Monetary Fund said on Thursday.

"The ingrained nature of inflation and inflation expectations mean that reducing inflation — even over a protracted horizon — will require significant increases in policy rates, which will weigh on growth," the IMF said in a report.

"Should high inflation expectations persist and inflation remain sticky, a more front-loaded path of interest rate increases may be needed," the IMF said.

RBI Governor Raghuram Rajan, a former IMF chief economist, has raised the key repo rate by 75 basis points to 8.00 percent since becoming head of India's central bank in September. He has made consumer prices its key inflation barometer, a shift away from using wholesale price inflation.

The latest 25 basis point increase, which surprised the market, was on January 28. Rajan, a former IMF chief economist, said in his last policy review that further rate hikes were not anticipated if the inflation trajectory remained subdued.

The consumer price index touched a two-year low in January at 8.79 percent as food prices cooled but was still much higher than the wholesale price index of 5.05 percent, an eight-month low.

The IMF expects India's consumer price index to remain near double digits well into next year driven by food prices.

It endorsed giving more emphasis to consumer prices for making policy decisions.

"Headline CPI should provide the principal nominal anchor for monetary policy, as food and fuel price shocks propagate rapidly into core inflation, and inflation expectations and wage formation are closely linked to CPI inflation," the IMF said.

The IMF expects India's economy to grow at 4.6 percent in the current fiscal year ending in March, picking up to 5.4 percent in the fiscal year that starts in April, which is in line with the RBI's expectations.

(Reporting by Suvashree Dey Choudhury; Editing by Richard Borsuk)

FILED UNDER:

Monetary Policy Committee

Reuters Showcase

Microfinance

Microfinance

Funding the unfunded: India helps small business borrow to grow  Full Article 

Insurance Sector

Insurance Sector

UK healthcare firm Bupa sees strong growth in India  Full Article 

Sensex Rises

Sensex Rises

Sensex edges up; consumer and healthcare stocks rise  Full Article 

Market Eye

Market Eye

FTSE adds nine Indian firms as large-caps in Asia-Pacific ex-Japan index   Full Article 

Indian Ocean Diplomacy

Indian Ocean Diplomacy

PM Modi to ramp up help for Indian Ocean nations to counter China influence  Full Article 

ECB Bond-Buying

ECB Bond-Buying

ECB raises growth forecasts, to start printing money next week  Full Article 

China Economy

China Economy

China signals "new normal" with lower annual growth target  Full Article 

Pharma Sector

Pharma Sector

Panel recommends waiving late-stage trials for some drugs  Full Article 

E-commerce

E-commerce

China backs e-commerce expansion in win for Alibaba, JD.com  Full Article 

Reuters India Mobile

Reuters India Mobile

Get the latest news on the go. Visit Reuters India on your mobile device  Full Coverage