SYDNEY -(Dow Jones)- India's economy is rebounding strongly from the effects of the global financial crisis and conditions are now in place for a gradual tightening of monetary policy to anchor inflation expectations, the International Monetary Fund said in its latest Article IV consultation paper issued Wednesday.

Indian economic growth is expected to accelerate to 8% in 2010-11 from 6.75% in 2009-10, the IMF said.

Agriculture is likely to contract by about 1% in 2009-10 due to drought but non-agricultural gross domestic product growth is expected to gather momentum, it said.

"With India's long-term prospects remaining strong and private sector balance sheets sound, we expect growth to be back at potential in 2010-11 even if advanced economies grow below trend," the IMF said.

The tone of the IMF paper and its forecasts are largely in line with recent comments by the Indian government.

The process of tightening macro-economic policy settings should start with monetary policy. "Conditions are now ripe for a gradual withdrawal of monetary accommodation," the paper said.

"Rupee appreciation should be the first response to capital inflows."

Other policy options, especially prudential measures, may be appropriate if asset price bubbles are a threat, it added.

The IMF also called for a reduction in India's 2010-11 budget deficit.

"With the recovery becoming entrenched and India's high debt, the risk of premature withdrawal of fiscal stimulus is low. Introducing reforms to underpin lasting consolidation will be of paramount importance," it said.

-by James Glynn, Dow Jones Newswires; 61-2-8272-4685; james.glynn@dowjones.com

Copyright © 2009 Dow Jones Newswires