IMF said RBI may face a tough choice between growth and inflation in upcoming policy review

The International Monetary Fund (IMF) has highlighted another dilemma the Reserve Bank of India (RBI) could face if inflation continues upward climb in future.

IMF has cautioned that if inflationary pressure continues to mount, India's central bank will have limited room to cut interest rates for supporting growth.

The international fund said in its 2019 India Article IV Staff Report that the sharper-than-expected slowdown in India accompanied by a negative output gap - growth below potential - will leave the RBI will no room to cut key interest rates further, especially if the economic slowdown shows no sign of recovery.

"Should inflationary pressures increase (stemming from the recent increase in food inflation and one-off prospective price increases in the auto and telecom sectors or resulting from fiscal pressures), the RBI will have limited room for further cuts", IMF said.

With economists now saying that India could face a prolonged growth slowdown, the RBI proceeded with caution in its last policy review and decided against a rate cut, leaving economists surprised.

But the RBI is more worried about controlling inflation, which has been on the rise over the last few months. RBI's six-member Monetary



Policy Committee held repo rate at 5.15 per cent citing high inflation and said it still has room to cut rates.

RBI Governor Shaktikanta Das, however, explained that the central bank has enough space to cut rates but it wants to wait and watch, and go for a rate cut when the timing is perfect. One of the points he stressed upon was inflation.

Retail inflation in India increased to 5.54 per cent last month, surpassing the central bank's medium-term inflation target of 4 per cent. More specifically, there has been a sharp rise in food inflation, which rose 10.01 per cent in November from a year earlier.

While inflation has kept RBI cautious, it is also concerned about manufacturing activity and growth.

"There exists considerable uncertainty on the food price trajectory, and the quantum of the impact of unseasonal rains on Kharif output would be known only early next year. The incoming data may also provide greater clarity on the growth outlook," RBI deputy governor BP Kanungo said.

If inflation continues to rise further, the RBI may skip cutting rates for yet another quarter and ultimately go for it in the first bi-monthly meeting of the next financial year after assessing decisions taken during the Union budget.