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Out-of-the-box monetary policy needed: Kaushik Basu

Press Trust of India
Jun 09, 2012 at 07:54am IST

Mumbai: Days ahead of credit policy review by the Reserve Bank, Chief Economic Adviser Kaushik Basu on Friday said "out-of-the-box" thinking is needed in the monetary policy and favoured slashing interest rates to boost sagging economic growth.

"What we need to do is to create more space for the private sector to invest. But my personal feeling is that given that growth in doing so poorly, and the investment mood is down, some easing up on interest rates in the form of a repo cut is worthwhile at this juncture. Our focus has to be entirely on growth at this point of time," Basu said.

Speaking after an Exim Bank function, he said when money made a bit more available, investment begins to pick up, which in turn allows a more energetic economy at this stage, given that growth is doing so poorly.

Out-of-the-box monetary policy needed: Basu

Kaushik Basu also said the economy is likely to grow at 7.6 per cent this financial year.

"In terms of monetary policy, we need to do some amount of thinking out-of-the-box," he said, adding that fiscal stimulus alone cannot do the needful in a highly gloablised economy.

Earlier in the day RBI Deputy Governor KC Chakrabarty said interest rate is not so high that it is hurting growth and that there is no proof to show that high rates have led to poor GDP numbers this year.

"I don't think that the interest rates are that high, or our policy rates are that high that should significantly affect growth. Growth is being affected for a variety of reasons. We are overplaying the interest rate aspect (for low growth). It may be one of the reasons," Chakrabarty said.

"I don't know how much growth sacrifice is due to lack of productivity, lack of efficiency, and how much is it due to inflation," he added.

The economy slumped to of 6.5 per cent in 2011-12 - lowest in nine years. Many have blamed the Reserve Bank's tight monetary policy Centre for the poor show. Perceived policy paralysis is also cited as reason for the slowdown.

Between March 2010 and October 2011, the RBI had hiked key lending rates by a whopping 375 basis points through 13 consecutive increases to rein in inflation which was near double-digits.

The Reserve Bank of India's mid-quarterly monetary policy review is slated for June 18.

"In a globalised world, you have to be careful about what other countries are doing. In today's world when money flows across the borders with much greater ease than in the past, you have to worry about that.

"For instance, liquidity tightening when we do today and another country is doing liquidity easing, it is like a large basin where at one end you have the tap on and while at the other end you have the drainage nozzle which is open which is flowing the liquidity from your side. You have to worry about that because there aren't barriers for flow of money," Basu said.

He also said the economy is likely to grow at 7.6 per cent this financial year.

Basu said he expects headline inflation to remain below 7 per cent for 2012-12.

On the ongoing eurozone crisis, he said the coming years could be worse. "If the European crisis breaks out in a big way, which is not impossible, especially in 2014, when the LTRO (long term refinancing operations) payback comes in December 2014 and February 2015, when as much $1.3 trillion need to be paid by 800 banks to the ECB.

"There will be a bit of jolt and it can spin Europe into crisis at that time. It is going to be a difficult one or two years for the world for sure. In this difficulty, emerging economies are in a position to build up strength so when we come out of this tunnel, we are completely at the top of it.

We will come out on top of growth drivers by 2015, he said.

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