RBI may need to keep tight monetary policy longer: IMF

Amid widespread expectations that Reserve Bank may further cut interest rates, the International Monetary Fund has said the central bank may require a “tight monetary stance for longer”.

With Finance Minister Arun Jaitley sticking to the fiscal deficit target of 3.5 per cent in Budget 2016-17, there are rising expectations that the apex bank might ease interest rates during its policy meet next month.

In its staff report on India, IMF said the monetary stance remains appropriately tight for achieving near-term inflation objectives.

“Following the formal adoption of the flexible inflation targeting regime in early 2015, progress to enhance communication and improve policy transmission continues.  Favourable inflation dynamics gave the RBI room to cut the policy rate, while maintaining positive real interest rates broadly consistent with the ‘glide path’ towards the medium-term inflation target,” it said.

IMF said that given upside risks to inflation, a re-emergence of inflationary pressures may require monetary tightening.

“Reducing still-high household inflation expectations will require a long period of low inflation which, unless underpinned by durable measures to boost food supply, may require a tight monetary stance for longer,” IMF said.

Meanwhile, the multilateral lender has projected a robust growth rate of 7.3 per cent for the country this fiscal, picking up to 7.5 per cent next year.

The staff report was prepared for the IMF Executive Board’s consideration on February 12, 2016, following discussions that ended on December 15, 2015, with the officials of India on economic developments and policies.

Based on information available at the time of these discussions, the staff report was completed on January 27, 2016.