India needs sustained increase in policy rates: IMF

The global financial institution International Monetary Fund (IMF) said the Reserve Bank of India (RBI) needs to continue to increase its policy interest rate considering the rate of inflation.

RBI Governor Raghuram Rajan, who became the head of RBI in September in 2013, has increased the repo rate by 75 basis points to 8 percent. An ex-IMF Chief Economist, Mr Rajan has made consumer price index (CPI) the key inflation indicator.

According to IMF report, “The ingrained nature of inflation and inflation expectations mean that reducing inflation — even over a protracted horizon — will require significant increases in policy rates, which will weigh on growth,” reported media.

Report adds, “Should high inflation expectations persist and inflation remain sticky, a more front-loaded path of interest rate increases may be needed.”

Earlier, the market witnessed an increase of 25 basis points on January, 28. While, Mr. Rajan, in his last policy analysis, said further increase of rates will not be necessary if the inflation trail remained submissive.  Also, the consumer price index recorded two-year low in January at 8.79 percent as food prices calmed but were still high than the wholesale price index of 5.5 percent.  

Interestingly, IMF foresees India’s consumer index to stay close to double digit figures in next year. IMF also stresses more on consumer prices for making policy decisions.