Hike in policy rates will pull down Indias GDP to 7.8% next year: IMF

The IMF warns that Asias rapid recovery from the global economic crisis has been accompanied by pockets of overheating across the region, the report stated.

It pointed out that tight labour markets,strong productivity growth and policy measures in India and China that boost household income will imply that wages continue to outpace inflation. This will have a negative impact of higher prices on real disposable income and consumption.

In IMFs estimate,after accounting for both the direct and indirect impact on inflation,a further 10 percent increase in global commodity prices in 2011 would lead to an additional 1 percent increase in headline inflation. The impact would be larger in China,India,and the Asean economies,whereas it would be smaller in Japan,Australia and New Zealand, it said.

The headline inflation in India stood at around 9 per cent in end-March,which is higher than the RBIs projection of 8 per cent,and much above the comfort level of 5-6 per cent.

Even though the Reserve Bank of India has raised key policy rates eight times over the past one year,the report suggests that policy rates remain below IMFs predicted levels for India. Real policy rates are still negative in several regional economies,including China,Korea,and India,and much lower than historical averages in Indonesia, it said.