India Inflation Threat May Force Subbarao to Add to Rate Rises, IMF Says

India’s central bank may have to keep raising interest rates to combat persistent inflationary pressures, the International Monetary Fund’s mission chief to the country said.

“We see a pretty strong underlying inflationary pressure still in there,” Masahiko Takeda said on a video on the IMF’s website. Monetary policy “has been appropriately tightened,” though “in our view there’s a possibility that further monetary tightening action may be needed to contain the high inflation.”

The Reserve Bank of India said Dec. 30 that threats to growth have “receded” and inflation risks “have come to the fore,” signaling it may tighten monetary policy further after boosting interest rates the most in Asia in 2010. Governor Duvvuri Subbarao, who increased rates six times in 2010, held off on raising borrowing costs in a Dec. 16 policy announcement as a record 1.1 trillion rupees ($24.3 billion) of share sales last year caused a cash squeeze in the banking system.

IMF’s Takeda made the comments after completing an annual review of India’s economy, which was discussed by the IMF board on Dec. 22. In the board’s conclusions released today, the IMF said that the Indian economy is expected to grow 8.75 percent in the fiscal year ending March 31, and 8 percent the following year. The IMF staff report was not published.

The IMF board also said it sees inflation measures between 8.5 percent and 10.5 percent amid “little slack in the economy, the ongoing exit from the policy stimulus introduced during the crisis, and structural factors affecting food prices.”

Less Inflation

India’s benchmark wholesale-price inflation cooled to near a one-year low of 7.48 percent in November. The reading exceeds the Reserve Bank of India’s goal of between 4 percent and 4.5 percent.

The Washington-based IMF also warned that capital inflows may increase more than India’s capacity to absorb them as growth remains “among the fastest” in the world and yields in advanced economies stay low.

“While exchange rate flexibility would remain the first line of defense, reserve accumulation and macroprudential measures could be employed if strong inflows continue,” the institution’s board said in an e-mailed statement.

Risks to growth are mainly linked to global expansion, the IMF said. It said “elevated inflation, fiscal consolidation needs, and buoyant capital inflows” as “near-term challenges” that call for “careful calibration of macroeconomic policies and the diligent pursuit of ongoing reforms.”