IMF expects RBI to confront inflation challenge

The International Monetary T Fund expects the Reserve Bank of India to effectively deal with the challenge of inflation, noting that the initial food price driven inflation now appears to be generalizing.   “At one point, it (inflation) was thought to be a temporary factor, but apparently, that is not the case, and the initial food price-driven inflation is now somewhat generalizing,“ IMF's India Mission Chief Masahiko Takeda said, adding: “So the Reserve Bank of India is now very concerned about it, and we expect the RBI to stay vigilant and take necessary action.“  If combating inflation is the immediate job on hand, the medium term challenge for India will be to focus on maintaining its current high growth, Takeda said, noting: “There must be some appropriate environment for high growth to continue.“  India, he said, would have to address struc tural reform issues in order to give a boost to infrastructure sector, enhancing foreign direct investment, boosting agricultural productivity and increasing the level of human capital.  Looking at the whole Asian region, the IMF reckons that inflation and overheating are the twin risks now confronting several key economies. Even while lauding the region for its sound growth performance and weathering the global downturn, it wants action to deal with the two dangers.  “Headline inflation has accelerated in the last six months and initially that reflected commodity prices, but we do see these pressures now spilling over into core inflation and inflation expectations,“ said Anoop Singh, Director of IMF's Asia and Pacific Department, providing an Asian perspective to the media at the just-concluded IMF-World Bank spring meetings.  The IMF expects inflation in many Asian economies to increase further this year before slowing modestly next year as global commodity prices stabilize and macroeconomic policies are tightened. “But the inflation risk for Asia is clearly on the upside,“ said Singh.  Overall the Asian region is expected to grow at 7 per cent in 2011 and 2012 (India is projected to grow at 8.25 per cent this year and 7.75 per cent next year), but the economies of the region have to stave off the danger of overheating. According to Singh, pockets of overheating pres sures have emerged across Asia in both goods and asset prices. The rising commodity prices pose an added risk, Singh said, noting: A more proonged disruption of industrial production n Japan could have effects on o t h e r economies n the region, and elsewhere in the world, that are linked to a pan through the global supply chain.“ The prescription for the whole region as it combats inflationary pressures will be “certainly further monetary tightening“. Exchange rate appreciation would help tighten monetary conditions, while some economies in Asia needed more fiscal consolidation, he said.  While IMF expects foreign capital flows into the region to continue this year and next, although at a lower pace than last year, Singh said global tensions could cause more volatility in inflows. “Macro prudential measures targeted at reducing the risks from volatile capital flows can be helpful, and they are being taken forward. They are complements to macroeconomic policy adjustments, but of course they are not substitutes,“ he said.