RBI needs to raise policy rates to bring down inflation, says IMF

The Reserve Bank of India (RBI) needs to further increase policy rates to bring down inflation on a sustained basis, the International Monetary Fund (IMF) said on Thursday.

In a note released ahead of the G20 meeting of Finance Ministers and central bank governors at Cairns in Australia, IMF said the government needed to take more steps to reduce stubbornly high inflation and the large fiscal deficit.

"Sustainably lowering inflation will also require further increases in the policy rate and a simpler monetary framework with clear objectives and operational autonomy for the RBI," said the IMF note.

Responding to the demand of industry to cut rate in view of declining inflation, RBI Governor Raghuram Rajan had recently said, "There is no point in cutting interest rates to see inflation picking up again."

The central bank is scheduled to announce its bi-monthly monetary policy on September 30.

The wholesale price (WPI-based) inflation dropped to a five-year low of 3.74 per cent in August, while the retail inflation was still at an elevated level of 7.8 per cent.

The IMF said removing supply bottlenecks would lead to more sustainable growth. It also called for increasing public spending on infrastructure to ease supply bottlenecks and support economic development.

While lauding the new government's emphasis on fiscal consolidation, it said "the quality and durability of the consolidation remain a cause of concern."

The government proposes to bring down the fiscal deficit to 4.1 per cent of gross domestic product (GDP) in current year from 4.5 per cent last fiscal.

The government had put in place a fiscal consolidation roadmap as per which the fiscal deficit has to be brought down to three per cent of the GDP by 2016-17.

Outlining the policy priorities before the G20, IMF said the group of 20 developing and developed nations should take steps to boost growth.

"Decisive structural reforms are needed across G20 economies to boost potential output and help ensure that growth is more sustainable," IMF said.

The 188-nation IMF said looking forward the global recovery should regain strength but downside risks have risen.

India will be represented by Commerce Minister Nirmala Sitharaman and RBI Governor Raghuram Rajan at the G20 meet.