RBI needs to gradually tighten policy: International Monetary Fund

New Delhi : The Reserve Bank of India (RBI) needs to gradually tighten monetary policy in view of inflationary pressure due to higher oil prices, increase in Khariff MSP and possible fiscal slippage, the International Monetary Fund (IMF) said today.

The report comes within days of the RBI raising benchmark short term lending rate (repo) by 25 basis points to 6.5 per cent citing inflationary concerns. It was the second such hike in a row.

The IMF said the monetary policy tightening in early June was appropriate and further gradual tightening will be needed. “The RBI will need to gradually tighten policy further, in response to inflation pressures, which will help to build monetary policy credibility,” the report said. It noted that headline and core inflation are rising and forecast to be above the mid-point of the headline inflation target band in the near and medium term, raising the probability that adverse shocks could push headline inflation above the RBI’s target range (4 per cent, +, – 2 per cent) and calling for a tighter stance.

The Fund described the Goods and Services Tax (GST) as a “milestone reform” in India’s tax policy, but pushed for a simplified structure, saying the multiple rate structure and other features could give rise to high compliance and administrative costs.

The Fund also said that a dual rate structure with a low standard rate and an additional higher rate on select items can be progressive and preserve revenue neutrality.

“Yet, the GST has a complex structure with a relatively high number of rates (and exemptions), which could be simplified without sacrificing progressivity of the current GST and with potentially significant gains from lower compliance and administrative costs,” it said.

In its report, the IMF Executive Board has forecast India’s growth to rise to 7.3 per cent in FY2018/19 and 7.5 per cent in FY2019/20, on strengthening investment and robust private consumption.

“The Indian economy is recovering from the two shocks that started from late 2016: demonetisation and then the kind of implementation issues related to the GST. We see growth recovering. Generally, India is benefiting from good macroeconomic policies; stability-oriented policies as well as some important reforms that have been done in recent years,” he said.

Medium-term headline inflation has risen to 4.9 per cent in May 2018, above the mid-point of the RBI’s headline inflation target band, said the Fund.

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