The International Monetary Fund (IMF) on Tuesday trimmed its 2018 global economic growth forecast by 20 basis points from its July prediction, but retained its India growth projection at 7.3% for the current fiscal, as a trade war between the US and others has started to hit economic activity.
In a worrying sign, the IMF predicts India’s current account deficit (CAD) to accelerate to 3% of GDP in 2018-19, worse than the 2.8% level predicted by most analysts and compared with 1.9% a year before, thanks to a spike in oil prices and rising demand. This could keep up pressure on the rupee, which has been flirting with new lows almost on a daily basis recently.
The Fund also sees the need for India to further tighten monetary policy as inflation is expected to pick up to 4.7% in the current fiscal, against 3.6% in 2017-18.
With trade tussles rising and interest rates in advanced economies expected to see an uptick, emerging market and developing economies require to be ready for an environment of higher volatility. Under floating exchange rate regimes such as the one in India, the Fund says, foreign exchange interventions should be restricted to addressing disorderly market conditions while protecting reserve buffers.
“A high interest burden and risks from rising yields also require continued focus on debt reduction (by India) to establish policy credibility and build buffers. These efforts should be supported by further reductions in subsidies and enhanced compliance with the goods and services tax,” it added.
India’s reform priorities should also include reviving bank credit and enhancing the efficiency of credit provision by accelerating a clean-up of bank and corporate balance sheets and ensuring improved governance of public sector banks, said the IMF.
Narrowing output gap and pass-through effects from higher energy prices and the rupee depreciation have driven up inflation (excluding food and energy items) to as much as 6%, it added.
“Monetary policy should be tightened to re-anchor expectations where inflation continues to be high (as recently done in Argentina), where it is increasing further in the wake of a sharp currency depreciation (Turkey), or where it is expected to pick up (India),” the IMF said.
Last week, the monetary policy committee (MPC) kept key policy rates unchanged, having already hiked the rates twice in the previous two meetings. It, however, changed the stance from neutral to “calibrated tightening”.
The IMF also cut India’s growth projection for the next fiscal by 10 basis points from its July forecast to 7.4%, mainly citing external factors, including “the recent increase in oil prices and the tightening of global financial conditions”. Still, the country would remain the world’s fastest-growing major economy.
The Fund forecasts growth to moderate to a sustainable rate in China, while it would improve in India due to structural reforms and demographic dividend.
India’s medium-term growth prospects remain strong at 7.75%, gaining from the ongoing structural reform, but have been marked down by just under 0.5 percentage point relative to the Fund’s April 2018 forecast, it added.
The IMF appreciated the Modi government for implementing important reforms, including GST, the inflation-targeting framework, the Insolvency and Bankruptcy Code, and steps to liberalise foreign investment and making it easier to do business.