New Delhi: The International Monetary Fund said Tuesday that India`s central bank may need to raise rates further to contain inflation and warned the next government that it would have little immediate spending firepower.
The comments by the Washington-based institution came a day after India began a marathon six-week election which is expected to end with the Hindu nationalist opposition taking power.
Their prime ministerial candidate, hardliner Narendra Modi, is promising a revival in economic growth and strong leadership, with optimism about his administration driving stocks to record highs in recent weeks.
But the IMF said the next government, most likely to be a coalition led by Modi`s Bharatiya Janata Party, could face the double challenge of higher interest rates and spending restrictions.
"Further tightening of the monetary stance may be needed for a durable reduction in inflation and inflation expectations," the IMF said in its biannual World Economic Outlook publication released Tuesday.
On the public finances, which were badly strained last year leading to a crash in the rupee, it said: "Continued fiscal consolidation will be essential to lower macroeconomic imbalances."
Finance Minister P. Chidambaram promised to contain the ballooning fiscal deficit at 4.6 percent of gross domestic product in the 2013/2014 fiscal year, which ended on March 31.
India`s finances have improved since last year when worries about the widening current account deficit and fiscal deficit led to concern that the country would face a full-blown crisis.
But after three interest rate increases since September, economic growth remains at a decade-low of 5.0 percent.
The IMF forecast expansion of 5.4 percent for this year and saw a modest uptick likely in 2015 to 6.4 percent.
Optimism about a centre-right government led by Modi, who is a viewed by some as as a business-friendly reformer, saw the main index of the Bombay Stock Exchange hit an all-time high of 22,620 points last week.