IMF slams Montek plan on forex use

The International Monetary Fund (IMF) has expressed concerns over the government's proposal to use foreign exchange reserves to finance infrastructure spending, a plan that was conceived by Planning Commission Deputy Chairman Montek Sing Ahluwalia.

A public information notice, on the Fund's executive board conclusion of Article IV consultations with India, and pasted on the IMF website, said the IMF directors supported the government's emphasis on closing India's infrastructure gap, but emphasised the importance of undertaking any increases in infrastructure spending within the limits of the Fiscal Responsibility and Budget Management (FRBM) Act.

On January 24, the IMF executive board concluded the Article IV consultations with India.

".... Using reserves in this manner has the potential to compromise perceptions of central bank independence and (to) increase inflation," the report said.

It noted that significant private sector participation in infrastructure will be forthcoming if India steps up its efforts to improve the investment climate and enhance the regulatory framework for public-private partnerships.

The Fund is in favour of further opening up of the banking system to private and foreign investors, including the raising of the FDI cap in private banks and eliminating the 10 per cent limit on voting rights for foreign investors.

The directors' report also called upon the Reserve Bank of India (RBI) to closely scrutinise the phenomenal rise in non-food credit. In this context, it hailed the recent RBI decision to increase the risk weight on consumer and housing loans.

The Fund also pointed to the large bank holdings of government securities as a significant potential risk in a rising interest rate environment, and emphasised the need to monitor more closely risk management practices of banks.

Lauding the RBI's efforts to contain the rising inflation rate, the report described the increase in the reverse repo rate in October as "timely" as it signals the RBI's commitment to price stability. This measure has stabilised inflation expectations and avoided the a more aggressive move later, it said.

The report, however, noted that while inflation has recently trended downward, strong domestic demand, comfortable liquidity, and the potential for further commodity price increases will require the RBI to continue to monitor inflation developments carefully.

On the RBI's policy of flexible exchange rates, the report said, "should capital inflows remain strong, increased flexibility will reduce inflationary pressures, facilitate economic adjustment, and encourage hedging of foreign exchange risk." It supported India's gradual approach to capital account liberalisation.