As India expects rate cut, IMF warns Rajan to keep policy tight

[MUMBAI] The International Monetary Fund just dumped cold water on those calling for a cut in Indian interest rates.

Prime Minister Narendra Modi's pledge this week to keep narrowing Asia's widest budget deficit - heeding a warning from central bank Governor Raghuram Rajan - prompted economists to forecast an imminent rate cut. Government officials also chimed in, saying the budget provided room to ease.

Yet the IMF has different advice for Rajan, a former chief economist at the multilateral lender: If anything, you might need to raise rates.

While the IMF assessed India's economy before Modi presented his budget on Feb 29, the overarching reality still holds. The Fund sees inflation accelerating to an average 5.3 per cent in the year starting April 1, from 5 per cent in the previous period. Rajan has a target to keep inflation within 5 per cent by March 2017 as he looks to sustain one of the world's fastest economic growth rates.

"In light of upside risks to inflation, the authorities should stand ready to raise the policy rate if inflationary pressures gather pace," IMF staff wrote in the Jan. 27 report released Wednesday.

The IMF addressed a pain-point Rajan himself has identified: convincing the nation's moms and pensioners that price gains will stay small. Doing so, the report said, "will likely require a prolonged period of low inflation, underpinned by a continued anti-inflationary monetary policy stance."

Twelve of 16 analysts surveyed by Bloomberg soon after the budget said they expect Rajan to lower the benchmark repurchase rate before the next scheduled review on April 5. Rajan, who cut rates four times last year and called his stance "accommodative," has said he will look at the budget as well as inflation when making his decision.

Consumer prices rose 5.7 per cent in January, the fastest pace in 17 months and the second-highest in Asia. The next data point will be released on March 14

BLOOMBERG