India urged to rein in inflation

Dubai: The International Monetary Fund (IMF) expects the Indian economy to continue growing but has recommended an increase in real interest rates to bring galloping inflation under control.

Noting that short-term real interest rates remained below historic norms and financing conditions had hardened only marginally, the IMF yesterday recommended further steps to bring the real re-purchase rate "clearly into positive territory".

The IMF welcomed the Reserve Bank of India's (RBI) moves to increase the frequency of policy reviews and to publish more guidance on future actions.

It recommended, however, that a new national Consumer Price Index be introduced.

"Utilising information from it in policymaking could increase the impact of monetary policy on inflation expectations," the fund said, highlighting the role of structural reforms in containing food inflation.

India's annual rate of food inflation rose nearly 400 basis points to the highest level in a year at 18.32 per cent for the week ended December 25, according to data released yesterday by the ministry of commerce and industry.

This was the fifth straight week of sharp rise in food inflation, which stood at 14.44 per cent in the previous week. Analysts believe it may result in positive rate action by the RBI.

The IMF has forecast that India's real GDP will grow at 8.8 per cent in the current year ending on March 31, moderating to 8 per cent in the following financial year.

The Indian economy grew at a higher-than-expected 8.9 per cent in the first half of the current financial year, driven by strong growth in the services sector and higher household consumption.

Services grew at an accelerated rate owing to increased government spending and a pick-up in trade, hotels, transport, communication and related sub-sectors.

The index of industrial production was driven higher by robust private consumption and a resurgence in investment demand.

Industrial growth has, however, now become volatile and is seen slowing in recent months from an average 16 per cent growth in the fourth quarter of 2009-10 to 12 per cent in the first quarter and 9 per cent in the second quarter of 2010-11.

Rating agency Crisil said it expects the overall decline in industrial growth to slow GDP growth to about 8.3 per cent in the second half of 2010-11. Good monsoons during the year have benefited the agriculture sector, which is likely to grow at about 5 per cent, Crisil said. This is greater than its long-term average growth of 2.8 per cent over the past two decades.

"The global crisis did not dent India's growth prospects the way it dented the prospects of the mature economies. India is well-positioned to sustain 8 to 8.5 per cent annual GDP growth over the next five years," Mayur Manchanda, senior fund manager at Mumbai-based Stellar Investments, told Gulf News.

Growth drivers

"What will drive this growth? What can raise the growth bar to 10 per cent? These questions are gaining more significance with a change in the global economic landscape, and consequently, a change in the nature of economic growth drivers," he said.

However, inflation continues be a worry, especially food inflation in a country where millions of people still spend more than 50 per cent of their household income on food.

"India's food inflation is currently driven more by structural than cyclical factors." Crisil said.

 Rupee may strengthen, erode expat savings

Low yields in advanced economies and India's favourable growth differentials could raise capital inflows above the country's capacity to absorb them, the International Monetary Fund (IMF) warned yesterday.

This is expected to strengthen the Indian rupee against the US dollar, which may affect the saving ability of expatriates in the UAE and other dollar-pegged nations, analysts said.

A wider current account deficit this year has, however, slowed the rupee's appreciation as India has used most of the capital inflows to fund the deficit.

"While exchange rate flexibility would remain the first line of defence, reserve accumulation and macro-prudential measures could be employed if strong inflows continue," the IMF said.

"Absorptive capacity could also be improved by deepening financial markets," the IMF said in a note.