The International Monetary Fund on Wednesday urged India to further ease money supply to fight economic slowdown while cautioning that additional expenditure and more tax reliefs could raise public debt to unsustainable levels.
Commending the steps taken by the Reserve Bank to ease money policy by reducing key policy rates and ratios, the IMF in its annual review of the Indian economy said, "(there is) scope for further monetary easing, in light of projected decline in inflationary pressures and the need to reinforce confidence and sustain bank credit."
Though the key short-run policy objective should be to sustain liquidity and credit flows, "monetary and structural policies will have to continue to carry most of the burden of adjustment", the review added.
Noting that the "sizeable fiscal stimulus" of 2008-09 should support economic growth in India, the review warned "given the high ratio of public debt to GDP, significant further expansion of the deficit could raise concerns about fiscal sustainability".
In a bid to boost money supply and ease interest rates, the RBI has reduced the short-term lending (repo) rate and cash reserve ratio (percentage of assets that banks keep with the RBI) to 5 per cent from 9 per cent in September.