Jayachandran/Mint

Jayachandran/Mint

Ourview | A dangerous remedy

Ourview | A dangerous remedy

Earlier this month, the Reserve Bank of India (RBI) raised interest rates for the 12th time in the last one-and-a-half years. During this time—barring a few months— inflation has remained close to double digits. At the same time, there is clear evidence that growth is slowing.

Linking these two facts has led to doubts if a tight monetary policy is delivering the results expected from it. So much so that chief economic adviser Kaushik Basu has argued in favour of a rethink on the continuous raising of policy rates by RBI. Should RBI take a “pause"?

We think not. Even after relentless raising of policy rates, real interest rates—however measured—are barely positive. Clearly, there is still scope for further tightening. If the fear is that high rates will hit the country hard in case the global economy goes into a recession, the remedy is simple: rates can be quickly cut by 100 basis points, or even more. Nothing prevents that.

Jayachandran/Mint

Seen together, not only is there scope for fiscal and monetary tightening, but there is also a strong case for a better monetary and fiscal policy mix. What the last few years, at least from 2007 on, show is that very often the two work at cross purpose. The government opens the spigots of spending and when inflation gets out of hand, expects the central bank to work magic. Conversely, when growth slows, there is pressure on RBI to “pause" even if inflation remains high. At such moments, inflation, it seems, is accorded lower priority.

The fact is that it is the government that needs to think “out of the box". It had two years since 2009 to devise innovative supply-side responses to manage those parts of inflation that allegedly are not under the purview of monetary policy. These include fixing the weak links in agricultural supply chains and allowing foreign direct investment in retail among other steps. In these, and other cases, it has done precious little. In the absence of these steps, monetary loosening will fuel further inflation.

Is it time to reconsider a tight monetary policy? Tell us at views@livemint.com

Close