IMF wants further tightening of policy

MUMBAI: The International Monetary Fund (IMF) has said that there is a case for further tightening of monetary policy to control inflation.

The IMF has also advised the Reserve Bank of India (RBI) not to clamp down on external commercial borrowings (ECBs), but instead liberalise capital outflows and ease long-term rates through a tightening of the fisc to manage global capital flows.

“We are not talking about slamming the brakes, but gentle tightening of monetary policy which has been underway already for about a year. It may need to continue depending on the underlying dynamism of the economy. RBI has to respond to the data as it comes since you cannot say in advance how much tightening is needed,” said International Monetary Fund deputy director Charles Collyns, speaking on the sidelines of a seminar on World Economic Outlook.

Mr Collyns’ remarks comes less than a week ahead of RBI’s monetary policy. Several central banks have tightened monetary policy in recent weeks and there are concerns that RBI may continue with its tightening in its annual monetary policy on April 24. There has also been speculation that the central bank may place controls on external borrowings to stem flow of global capital. The IMF has, however, advised against such a move.

“It would be a mistake to introduce administrative controls (on ECBs). In India, there have been controls on ECBs for many years. It would be better to move to market mechanism to make sure that capital flows are better managed together with monitoring of financial implication,” he said, adding that while there may be concerns over unhealthy companies expanding their balance sheet because of easy liquidity, it’s for the monitoring authorities to prevent such cases.

Instead of administrative controls, he recommended that India could use other tools for managing capital flows. These included liberalisation in overseas investment and a tighter fiscal policy for more rapid fiscal consolidation. This would enable to bring about a regime of lower rates at the long-end to allow for capital inflows in infrastructure.

Commenting on India’s growth prospects, he said that the IMF expected the country to grow at a more sustainable growth rate of 8.5% this year as against last year’s 9% which, it felt, was unustainable. He added that a small US slowdown would unlikely to have any impact here.

“If the US were to slow down more significantly, there would be a spillover effect. For instance, a 1% reduction in growth in the US could result in a 0.4% lower growth for India,” he said. He added that the world is shrugging off the US slowdown as for a year and a half the rest of the world has accelerated even as US slowed down.

”The US is no longer an essential driver as you have alternate strengths in China, India and Europe. This has kept commodity prices strong and served as the basis for growth in Africa,” he added.