NEW DELHI (Reuters) - India’s central bank will need to gradually tighten monetary policy further due to rising inflation, driven mainly driven by higher oil prices and a falling rupee, the International Monetary Fund said on Wednesday.
The Reserve Bank of India raised the repo rate INREPO=ECI for the second straight meeting last week by 25 basis points to 6.5 percent, while warning about the inflationary pressures.
The average inflation is likely to rise to 5.2 percent in 2018/19 from a 17-year low of 3.6 percent in the previous fiscal year, the IMF said.
It said inflationary pressures were also exerted by a pick up in domestic demand and recent hike in procurement prices of major crops by the government, as it seeks to win support from farmers ahead of national elections next year.
India’s annual consumer inflation INCPIY=ECI hit 5 percent in June, staying above the RBI’s medium-term 4 percent target for an eighth consecutive month.
“The RBI will need to gradually tighten policy further, in response to inflationary pressures, which will help to build monetary credibility,” the IMF said in its annual report.
The current account deficit is forecast to widen to 2.6 percent of gross domestic product in 2018/19, from 1.9 percent in the previous year, due to higher oil prices and strong demand for imports.
The IMF projected global crude oil prices to average $72 a barrel in 2018/19, up from $62 in its earlier forecast.
The report welcomed economic reforms undertaken by prime Minister Narendra Modi’s government, such as the introduction of a nationwide Goods and Services Tax (GST) and moves to allow more foreign investment in new sectors.
The report, prepared after consultations with government officials, also warned that India was at risk of a shortfall in tax revenue this year due to continued problems with implementation of GST and a delay in financial sector reforms.
It also forecast India’s economy could grow at 7.3 percent in the current fiscal year and 7.5 percent in 2019/20.
Ranil Salgado, IMF mission chief for India said the economy was gaining momentum and the government should reinvigorate reform efforts to accelerate growth and create more jobs.
“This is critical in a country, where per capita income is about $2,000, still well below that of other large emerging economies.”
As one of the of world’s fastest-growing economies - accounting for about 15 percent of global growth - Indian economy has helped lift millions out of poverty, the report said.
Reporting by Manoj Kumar; Editing by Simon Cameron-Moore