RBI Aims to Tighten Monetary Policy due to Inflationary Pressure, IMF says

With rising inflation at hand, the central bank needs to tighten the monetary policy little by little because of rising inflation due to rising higher oil prices and depreciating price of the rupee, according to the International Monetary Fund on Wednesday.

The Reserve Bank of India increased the repo rate for the second consecutive meeting in the previous week by 25 basis points to 6.5 percent with risks of inflationary pressures.   

It will probably increase to 5.2 percent this year and the next from 3.6 percent of the 17-year low in the previous fiscal year as reported the IMF said.

It says that inflationary pressures boosted by a pick up in domestic demand and the latest hike in procurement price of major crops by the government, looking for support from farmers prior to national elections in 2019.

The annual consumer inflation reached 5 percent in June and remained higher than the  4 percent target medium term for an eighth consecutive month.

Tightening of policies will aid in establishing monetary credibility as a resolution to inflationary pressure based on the annual report of the IMF. The present account deficit forecast of gross domestic product in 2018 to 19 is presumed to widen by 2.6 percent from 1.9 percent in the previous year because of oil prices and strong demand for imports.

The projected global crude oil quotations increased from the earlier forecast of $62 to $72 average a barrel in 2018/19.

Economic reforms were undertaken by the government of Prime Minister Narendra Modi including a nationwide Goods and Services Tax (GST) and moves by the foreign investment in new sectors.

A risk on a shortfall in tax revenue is at risk this year because persistent problems with implementation of GST and slowed down reforms in the financial sector.

The Indian economy will likely grow at 7.3 percent in the present fiscal year and 7.5 percent next year and the year after.