India?s central bank needs to aggressively hike interest-rates over the next year and a half to contain inflation as economic growth comes back to the pre-crisis levels, the Organisation for Economic Cooperation and Development (OECD) said on Wednesday. The group of developed countries projected an 8.3% growth rate for India in the current calendar year (2010) and a slightly higher 8.5% in 2011, way higher than 6.6% growth in last year.
“A boom-bust scenario cannot be ruled out, requiring a much stronger tightening of monetary policy in some non-OECD countries, including China and India, to counter inflationary pressures and reduce the risk of asset price bubbles,” OECD said in its Economic Outlook report. India’s central bank had brought down the interest rates to record low levels in 2008 to give a boost to Asia’s third largest economy that was reeling under global financial meltdown. The interest rates were hiked twice by 25 basis points each since mid-March to anchor the inflationary expectations. With economy poised to enter high-growth trajectory and the headline inflation close to double digit territory central bank is expected to hike interest rates in the quarterly policy review that comes in July.
India?s central bank signalled on May 19 that it may raise interest rates in a measured manner as Europe?s debt crisis outweighs inflation concerns. Soverign default crisis in Euro Zone could turn out be a drag on India’s resurgence as foreign capital takes flight to dollar denominated assets.Global economic conditions have changed in the past six weeks and a ?cautious pace is the best way to go and that is the stance,? Subir Gokarn, the deputy governor in charge of monetary policy at the Reserve Bank, told reporters on May 19.
But OECD report highlighted need for interest rate hikes and said that ?with inflation remaining elevated, and the recovery appearing to have taken root, there is a risk that price increases for inputs will flow through to second-round increases and that inflationary expectations will become destabilised.?
Last year worst monsoon rains in more than 37 years had adversely affected the summer crops pushing up food inflation to highest in a decade of above 20%. This year India’s official wether forecaster has predicted normal monsoon rains which will help in taming the food inflation. Earlier this week Prime minister Manmohan Singh assured more steps from government to tackle inflationary pressures and added that headline inflation will be brought down to 5-6% by December.
The OECD’s half yearly review upgraded the global growth forecast for this year to about 4.75% after a shrinkage of 0.9% in 2009.