New Delhi: The International Monetary Fund (IMF) has warned that Asian economies, including India, may face “more weakness" as a result of the slowdown in developed economies and the strain in local financial markets. IMF also cut its forecast on India’s growth to 7.9% for 2008 and 6.9% for 2009. It had earlier forecast the economy to expand at 8% for both the years.

Tightening economy: A file photo of IMF chief Dominique Strauss-Kahn. IMF, in its latest report, said ‘insufficient’ monetary policy tightening has led to spiralling inflation in India. Philippe Wojazer / Reuters

Economists agree that the inflation risk has not declined significantly.

“We also think that inflation has not totally subsided. We are slightly surprised with the cut in the cash reserve ratio (or CRR, the proportion of deposits commercial banks need to keep with the central bank) by the Reserve Bank of India (RBI)," said Indranil Pan, chief economist at Kotak Mahindra Bank Ltd. “But the tight liquidity situation had brought down the domestic credit market almost to a stand still.... I am sure RBI will not cut policy rates in its monetary policy review later this month."

RBI cut the CRR by 50 basis points to 8.5% on Monday.

Satish Chandra Jha, a member of the Prime Minister’s economic advisory council, said he expects no downward trend in inflation. “The RBI should increase interest rates further as it has a direct impact on inflation rate. I also believe that the monetary tightening came late, resulting in a slower impact on inflation. The central bank should also try and curb money supply to around 15-21% at present," said Jha, also a former chief economist at the Asian Development Bank.

Without naming India, the IMF report said fiscal restraint could help reduce inflationary pressures, especially in countries where rising food and fuel subsidies as well as public wage increases have weakened fiscal positions and contributed to price pressures.