RBI has scope to cut rates, feels IMF

But it tells advanced countries, especially the US Federal Reserve not to raise interest rates

GN Staff | September 4, 2015


#Imf   #rbi   #international monetary front   #reserve bank of india   #inflation  

While asking the central banks of advanced economies to "maintain supportive policies" and refrain from raising interest rates too quickly, the International Monetary Front (IMF) has said that there is room for the Reserve Bank of India to cut rates.

However, it said "while the faster-than-expected fall in inflation has created space for considering modest cuts in the nominal policy rate, medium-term inflationary pressures and upside risks to inflation remain."

The caution and advise are part of IMF report on Global Prospects and Policy Challenges being released ahead of G-20 meeting in Ankara, Turkey.

Earlier, IMF had been consistently demanding tight monetary stance in case of India, so in a way this is its partial shift of the policy advice. But, it balances the advise by warning against upside risks to inflation.

Though it did not give details of these risks, those may come from damage to rabi crops if monsoon does not progress well in September.

The RBI is widely expected to cut rates in its policy review later this month, or even earlier.

IMF said near-term growth prospects remain favourable and external vulnerabilities have decreased, but here also it cautioned against some macroeconomic imbalances.

It talked of balance sheet strains in the corporate and banking sectors. To tackle this, it prescribed that financial sector regulation be enhanced, provisioning increased, and debt recovery strengthened.

It said growth in India, one of the world’s largest commodity importers, will benefit from recent policy reforms, a consequent pickup in investment, and lower commodity prices.

IMF's observation comes at a time when economic expansion in India slowed down to 7% in the first quarter of the current financial year against 7.5% in the previous quarter.

The multi-lateral agency said domestic demand in India is accelerating, underpinned by the collapsing commodity-import prices. Despite lower growth in India, it remains one of the fastest growing large economies along with China. This is when IMF said global growth remains moderate, reflecting a further slowdown in emerging economies and a weak recovery in advanced economies.

Also, it warned that its earlier projections for economic growth of emerging markets and developing economies would face downward risks from rising financial market volatility, declining commodity prices, weaker capital inflows, and depreciating emerging market currencies.

Meanwhile, the IMF warned that risks to the global economy are mounting amid slowing growth in China, tanking emerging economies and unease over international financial markets.

In view of these challenges, the IMF urged the central banks of advanced economies to refrain from raising interest rates too quickly.

The IMF said the performance of many economies is again falling short of expectations.

It called for action to boost flagging growth rates and raise the medium-term performance of the world's largest economies from the current "moderate" level. Productivity growth in advanced economies has also been persistently weak, the fund noted.

The fund called on the United States Federal Reserve to "remain data-dependent" and not rush to raise interest rates since there has been "little evidence of meaningful wage and price pressures so far".

Amid the turmoil, Asian economies appear to be holding up and are doing "pretty well", IMF chief Christine Lagarde said on Wednesday while in Jakarta on a two-day visit.

"What has been demonstrated in the last few weeks is how much Asia is at the core of the global economy, and how much disruptions occurring in one market in Asia can actually spill over to the rest of the world," she said.

Despite external pressures and the slower pace of expansion in Asia, Ms Lagarde said "this whole region, in the world, is doing pretty well", and would continue to be a key source of global growth.

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