On February 6, 2006, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with India.1
Background
India's growth has remained robust in 2005/06 following a strong performance last year. With rapid growth in services broadening to encompass industry, GDP growth in 2004/05, at 7½ percent (recently revised upward from 6.9 percent) was above the historical trend. Strong momentum in manufacturing and services has continued, resulting in rising capacity utilization and soaring business confidence. Staff projects growth of over 7½ percent this year, led by strong domestic demand, and broadly in line with the Reserve Bank of India (RBI) and consensus forecasts. In 2006/07, growth is expected to decline slightly as the economy further adjusts to higher oil prices and domestic and world interest rates rise.
While inflation remains low, underlying pressures from buoyant domestic demand and higher international energy prices remain strong. Steps taken by the RBI to tighten liquidity in 2004/05, including raising reserve requirements and policy interest rates, and incomplete pass-through of higher oil prices helped keep WPI inflation low. With headline inflation hovering around 4½ percent year on year, the RBI raised overnight repo rates again in October 2005 and January of 2006, by a cumulative 50 basis points, citing concerns about the rapid pace of aggregate demand and monetary growth and high oil prices. Staff projects inflation to rise from an average of about 4¾ percent in 2005/06 to 5½ percent in 2006/07, in part reflecting the adjustment of administered fuel prices.
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