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The International Monetary Fund (IMF) may have sounded a little optimistic on India’s growth prospects, but has a soft warning when it comes to inflationary pressures.

The fund expects inflation globally to come back to pre-pandemic levels by the middle of 2022 and highlighted that central banks of countries that are seeing a surge in inflation should not shy away from tightening their policies. “Early preemptive action will be required where there is a tangible risk of rising inflation expectations and more persistent price increases," IMF said in its latest world economic outlook report.

Fast and furious
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Fast and furious

The fund believes that inflationary expectations are divergent among emerging economies. The monetary policy responses may be tailor made for country-specific inflation trajectories. That said, the fund cautioned against waiting too long for employment and output to bounce back at the risk of a flare-up of inflationary expectations. “Prolonged supply disruptions, commodity and housing price shocks, longer-term expenditure commitments, and a de-anchoring of inflation expectations could lead to significantly higher inflation than predicted in the baseline," it said. For India though, the assessment so far has been that inflationary pressures are transitory and largely because of supply side bottlenecks. The latest inflation print for September has strengthened this view.

Retail inflation is now down to 4.5%, mainly led by easing of food prices, on expected lines. However, India’s inflation problem currently stems from a surge in the price of global oil. Here, IMF has said that the impact of oil price shocks on inflation expectations is small but significant. In other words, to ignore the current oil price surge and its impact on domestic inflationary expectations would be foolhardy.

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