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IMF prods India to cut interest rates
Lalit K Jha in Washington
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March 18, 2009 19:32 IST
Last Updated: March 18, 2009 19:41 IST

The IMF advised India on Wednesday to initiate more monetary steps to battle the country's slowing economic growth, which the international multilateral agency expects to moderate to 6.25 per cent in the current fiscal and fall further by one percentage point in 2009-10.

With inflation softening to a six-year low of 2.43 per cent, there is scope for further easing of monetary policy, the IMF said in its review of the economy following Article IV consultations with the Indian authorities.

"A number of (IMF) directors saw scope for further monetary easing, in (the) light of the projected decline in inflationary pressures and the need to reinforce confidence and sustain bank credit," the review said.

The IMF expects average inflation to moderate to 2 per cent in 2009-10 from about 8.8 per cent in the current fiscal. Inflation has been coming down consistently after touching a peak of 12.91 per cent in August last year.

The gross domestic product growth rate in the current fiscal has been projected at 6.25 per cent by the IMF, as against the government's forecast of 7.1 per cent.

The IMF expects the growth rate in the next fiscal (2009-10), beginning less than a fortnight from now, to fall to 5.25 per cent.

As part of the annual exercise to review the economies of the member countries, the IMF's executive board had held consultations with the Indian authorities on February 6.

While suggesting that India focus on monetary measures, the IMF cautioned that additional expenditure and more tax reliefs for fighting economic slowdown could raise public debt to unsustainable levels.

Noting that the key short-run policy objective should be to sustain liquidity and credit flows, the review said 'monetary and structural policies will have to continue to carry most of the burden of adjustment'.

The 'sizeable fiscal stimulus' of 2008-09 would support economic growth in India, the review said, adding, 'given the high ratio of public debt to GDP, significant further expansion of the deficit could raise concerns about fiscal sustainability'.

In a bid to boost money supply and ease interest rates, the RBI has gradually reduced the short-term lending (repo) rate and the cash reserve ratio (percentage of assets that banks keep with the RBI) to 5 per cent from 9 per cent in September.

The central bank has since mid-September injected more than Rs 4,00,000 crore (Rs 4,000 billion) into the system to help industry reeling under the impact of global financial meltdown.

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