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NEW DELHI : The International Monetary Fund (IMF) on Tuesday raised its inflation forecast for India to 5.6% for this fiscal from the 4.9% estimated in April, citing growing inflationary risks worldwide even as it kept its growth forecast for the year unchanged at 9.5% for Asia’s third-largest economy.

“We don’t have a change to our growth forecast for this year and next for India. India came out of a very, very tough second wave, and that led to a big downgrade in July, but we have no change as of now. There are many challenges the Indian economy does face with regard to the financial market, with regard to the fact that the virus has not gone yet. India is doing well in terms of vaccination rate, and that is certainly helpful," said Gita Gopinath, chief economist at the IMF.

Cautious stance
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Cautious stance

On sustainability of India’s high fiscal deficit, Malhar Nabar, division chief at the research department of the IMF, said there is still room for support if needed, if the pandemic takes a turn for the worse. “To provide it in a targeted manner to the worst affected households and firms. Over the medium term, it will be important to put in place a credible medium-term strategy to bring down the debt-to-GDP ratio and create space to meet the future development needs and infrastructure needs of the Indian economy," he added.

The latest projections by the IMF, part of its World Economic Outlook, came on a day when India’s retail inflation data for September came in at a five-month low of 4.35% on sharply decelerating food inflation, providing comfort to the central bank, which kept policy rates unchanged for the eighth time in a row last week to support a nascent economic recovery.

A Mint poll of 15 economists had estimated retail inflation at 4.5%.

Data separately released by the statistics department showed Index of Industrial Production (IIP) for August inched up to 11.9% from 11.5% a month ago. However, sequentially, IIP contracted 0.2% in August, indicating industrial recovery is yet to be fully anchored.

In September, food inflation decelerated to 0.68% from 3.11% a month ago as vegetable prices dipped 22.47% from their level a year ago.

IMF said policymakers need to walk a tightrope between acting patiently to support the recovery and at the same time preparing to act quickly if inflation expectations show signs of de-anchoring. “While monetary policy can generally look through transitory increases in inflation, central banks should be prepared to act quickly if the risks of rising inflation expectations become more material in this uncharted recovery. Central banks should chart contingent actions, announce clear triggers, and act in line with that communication," it added.

In its latest bi-monthly monetary policy review last week, the Reserve Bank of India seemed more comfortable about the path of inflation than it was in August, despite the recent increases in global commodity prices. The central bank has cut its retail inflation forecast to 5.3% for this fiscal from 5.7% earlier.

“Going forward, the inflation trajectory is set to edge down in Q3:2021-22, drawing comfort from the recent catch-up in kharif sowing and likely record production. Along with adequate buffer stock of foodgrain, these factors should help to keep cereal prices range-bound. Vegetable prices, a major source of inflation volatility, have remained contained in the year so far and are likely to remain soft, assuming no disruption due to unseasonal rains. Supply-side interventions by the government in the case of pulses and edible oils are helping to bridge the demand-supply gap; the situation is expected to improve with kharif harvest arrivals," RBI’s monetary policy committee said in a statement.

The MPC, however, observed that pressures persist from crude oil prices, which remain volatile over uncertainties on the global supply and demand conditions. “Domestic pump prices remain at very high levels. Rising metals and energy prices, acute shortage of key industrial components and high logistics costs are adding to input cost pressures. Weak demand conditions, however, are tempering the pass-through to output prices. The CPI headline momentum is moderating with the easing of food prices which, combined with favourable base effects, could bring about a substantial softening in inflation in the near term," it added.

Aditi Nayar, chief economist at ICRA Ratings, said the MPC will choose to continue to ignore supply-side risks to inflation, especially if they emanate from a global surge in commodity prices, on which monetary policy has little impact.

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