India’s interest rates should rise further to combat rising inflation, according to research performed by the IMF.
Sanjaya Panth, a senior resident representative for the Asia and Pacific Department in India, has indicated a rise in real interest rates is necessary as the country’s main interest rate is currently lower than the inflation projections for the wholesale price index of 6.5%.
Panth was unwilling to specify a level, but indicated real interest rates should rise into positive territory with room for further increase.
Panth praises the government for freeing up the price of fuel and diverting money from fuel subsidies to more productive areas.
India imports a considerable quantity of fuel and is particularly vulnerable to the current rise in oil prices.
However, Panth says the decrease in subsidies will add to the first round of inflation and warns India needs interest rate rises to compensate. (article continues below)
According to Panth, inflation, although higher than in previous years, need not be a long-term phenomenon and the Reserve Bank of India has been attempting to nip expectations in the bud.
The IMF’s findings indicate that India already has a sufficient system of capital controls in place. It maintains the country may find it more effective to adopt macroprudential measures to ensure sectors of the economy – such as real estate – do not overheat.
Despite a widening current account deficit, the IMF says, high reserves and low short-term debt should reduce in India’s vulnerability to external shocks compared with many other countries.