The International Monetary Fund (IMF) has said steep decline in inflation has created a room for the Reserve Bank of India to cut rates, but cautioned against upside risks to inflation.
“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,” it said in its report on Global Prospects and Policy Challenges ahead of G-20 meeting in Ankara, Turkey.
Earlier, the 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 might come from damage to kharif 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.
The Wholesale Price Index (WPI) continued to show deflation for the ninth month in a row, at 4.05 per cent in July.
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 per cent in the first quarter of the current financial year against 7.5 per cent 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.