The International Monetary Fund lowered India’s growth rate prediction by 0.1 percentage points to due to high oil prices and a tight monetary policy regime.
While the GDP for 2018-19 has been lowered to 7.3 percent, it trim is sharper for the year 2019-20 at 7.5 percent, a decrease of 0.3 percentage points.
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In April this year, the IMF said that it expects India to re-emerge as one of the fastest growing major economies in the 2018 – 2019 period, projecting the country’s growth rate at 7.4 percent in 2018 and 7.8 percent for 2019.
In its latest World Economic Outlook (WEO), the IMF noted that the reduction in growth predictions was due to the negative impact of the recent hike in oil prices, coupled with a modification of the monetary policy due to soaring inflation rates.
“The projection is 0.1 and 0.3 percentage points lower for 2018 and 2019, respectively, than in the April WEO, reflecting negative effects of higher oil prices on domestic demand and faster than-anticipated monetary policy tightening due to higher expected inflation,” it said.
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It explained that the increase is mainly due to the strong private consumption, as well as fading transitory effects of demonetisation and implementation of the national Goods and Services Tax.
India’s economy grew at a four-year-low of 6.7 per cent in 2017-18. Despite the lowering of the growth rate for FY19, IMF’s projections are now in sync with what other agencies — the World Bank and Asian Development Bank — have predicted.
It said central banks in key emerging market economies — including Argentina, Mexico, Turkey, India and Indonesia — have raised policy rates, responding to inflation and exchange rate pressures (coupled with capital flow reversals in some cases).
Current Monetary Policy and Crude Situation
The RBI hiked the policy rate by 25 basis points in June 2018, for the first time in four and a half years, citing a major upside risk to inflation on the back of high crude oil prices.
The RBI had said there was a 12 per cent increase in the price of Indian crude oils basket, which was “sharper, earlier than expected and seems to be durable”.