India needs more tightening: IMF

India needs to speed up its return to pre-crisis monetary and fiscal policies to help bring down elevated inflation, the International Monetary Fund said on Wednesday.

India's economic growth is expected to remain above trend in the coming year, and inflation measures are in the 8.5 percent to 10.5 percent range, the IMF said in its regular report on the economy, known as an Article IV consultation.

This strong economic growth has attracted a heavy flow of foreign capital, which can help spur much-needed investment in India but could also complicate macroeconomic management, the IMF cautioned.

"Near-term challenges confronting the authorities arise from elevated inflation, fiscal consolidation needs, and buoyant capital inflows, warranting careful calibration of macroeconomic policies and the diligent pursuit of ongoing reforms," IMF directors wrote in their assessment.

The IMF said most directors recommended the Reserve Bank of India take further steps to tighten monetary policy, noting that real interest rates were below historic norms and financial conditions were comfortable.

They also saw "merit" in strengthening fiscal consolidation to remove more quickly the stimulus put in place during the global financial crisis.

"Saving this year's over-performance in revenue and one-off receipts could help reconstitute fiscal space," they said.

If capital flows rise above India's ability to absorb the investment, the IMF said exchange rate flexibility would be the first line of defense.

"Reserve accumulation and macroprudential measures could be employed if strong inflows continue," IMF directors said.

Hot money has become a big problem for many emerging markets that are growing far faster than the world's advanced economies. The worry is that these waves of capital will trigger inflation. They can also become a destabilizing force when investors suddenly withdraw money.

- Reuters, 6 January 2011