Limited scope to ease monetary policy: IMF

The International Monetary Fund (IMF) has said in a paper released during the two-day G-20 Summit that India has limited scope of easing monetary stance, which might have to be even tightened due to high inflation.

The IMF paper released mid-week noted that in countries where high inflationary pressures persist, including from supply bottlenecks as in India, Brazil and Indonesia, the scope for easing monetary stance may be “very limited or it may need to be tightened; and more efforts to better anchor expectations may be required where strong nominal anchors are not well established”.

IMF said that India, Brazil, Indonesia, Turkey and South Africa have been plagued by high inflation and balance of payment pressures, even as Brazil, China and Turkey continue to witness rapid credit growth.

The IMF paper noted that emerging and developing economies have seen slower growth momentum while growth projections for the near term are being revised downward for emerging economies with risks still to the downside.

“Emerging economy growth is some 2.50 percentage points below 2010 levels, with Brazil, China and India mainly accounting for this growth slowdown. The outlook for many commodity exporters (including those among the BRICS) has also deteriorated due to lower commodity prices,” the IMF paper noted.

Adding that financial conditions are generally tighter and market pressures continue for some emerging economies, the paper said that emerging economies were hardest hit following the Fed tapering off its bond-buying program last month.

It said that while global imbalances have narrowed last year, and, despite some further progress, policies have played a relatively minor role. “To foster rebalancing that is supportive of growth, structural reforms that increase internal demand in surplus economies on a sustained basis (in particular, private consumption in China and private investment in Germany) and raise external competitiveness in deficit economies (Brazil, India, Euro area periphery, and the United Kingdom) remain necessary,” the paper said.

IMF suggested that cyclical weakening calls for monetary policy easing, or less tightening, for those economies where inflation and expectations are well anchored to provide room for maneuver.

For countries with strong fiscal positions, fiscal policy, generally, should allow stabilizers to work but avoid stimulus unless a major slowdown looms, IMF said.

While initial portfolio outflows from emerging markets in the May-June period were more broadbased, more recently, market pressures have been more concentrated on particular economies with important financial or macroeconomic vulnerabilities.

Volatility and local bond yields increased sharply, equity markets and currencies fell
(depreciating 6.50 per cent on average since May 22), and some emerging economies saw liquidity pressures and reversal of capital flows.

“Recent financial turbulence and continued market pressures in some economies appear to be driven by both push and pull factors,” the paper said, adding, ““On the pull side, deteriorating fundamentals in some emerging economies have also played a role.”

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