IMF sees signs of overheating in Asia

IMF sees signs of overheating in Asia

Mumbai: A number of Asian economies, including India, are showing signs of overheating, indicated by a sustained rise in prices, a top International Monetary Fund (IMF) official said.

A strong monetary stance to pare local demand, which the Reserve Bank of India (RBI) adopted earlier this month, is a welcome step, according to Anoop Singh, director of Asia and Pacific department, IMF.

The agency expects Asian inflation to moderate in 2012 after peaking in 2011, but “risks are tilted to the upside," said Singh, who was in Mumbai to discuss the Asian economic outlook and the opportunities and challenges for India.

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To check runaway inflation, RBI on 3 May raised its policy rate by 0.5 percentage point to 7.25%, the ninth increase in a year, which the central bank hopes will cool inflation, currently at around 9%, though it may curb growth.

“RBI has acted successively and very substantively last week, and there is a clear sense to maintain this policy until inflation declines," Singh said at a press conference. “We strongly welcome the monetary actions that RBI has taken."

Asian economies have recovered from the global financial crisis faster than expected and output gaps are closing fast, he said.

“Asia’s rapid growth has been accompanied by the emergence of overheating pressures, in both goods and asset prices, as output gaps have generally closed," Singh said.

While the spike in inflation was initially due to higher commodity prices, “pressures have now spilled over into core inflation (rise in prices of non-food, manufacturing items) and inflation expectation in a number of countries, including in India," Singh said.

To be sure, India will find it difficult to reduce the fiscal deficit in the year that began on 1 April, requiring “the need to streamline and contain the rise in key spending targets", he said.

IMF estimates that China and India will lead Asian growth in 2011-12 at 9.5% and 8%, respectively. Growth in India will moderate from peaks in 2010 towards “potential growth rates," the fund has said.

However, renewed spikes in energy and food prices could affect Asia’s growth and inflation outlook, Singh said.

“India, among other countries, is particularly vulnerable to food and energy price disruptions," he said. India, Asia’s third largest oil consumer, imports over two-thirds of its oil needs.

If IMF’s expectation of inflation moderating by 2012 comes true, the high growth rate and growth differential of Asia over advanced economies will attract higher capital flow in the region, according to Singh.

“The investment outlook for India and Asia, as we look ahead in the next three to five years, is very positive," said Singh. “But the challenge is to ensure that we have a framework that direct these capital flows to sectors such as infrastructure, which are very important to sustain growth."