Basu for reversal of tight monetary policy to combat slowdown

Basu for reversal of tight monetary policy to combat slowdown

New Delhi: Worried over slowdown, as reflected by the July IIP numbers, chief economic advisor Kaushik Basu on Monday suggested reversal of the RBI’s tight monetary policy to give a boost to the economy.

“We have to seriously look at whether we should stick to the policy we have used, which is the very standard policy or begin to think out of box," Basu said when asked if the Reserve Bank should now stop hiking rates.

He was talking to reporters after the IIP data for July plunged to a 21-month low of 3.3%.

The central bank has been hiking interest rates since March, 2010, in its bid to tame inflation, but experts say that high cost of credit was impacting economic activities. The RBI is scheduled to review its monetary policy on Friday.

“... it (IIP numbers are) very disappointing...It is a sign of slowdown," he said, adding high inflation and global economic situation were the factors behind the slowdown.

“There is liquidity tightening taking place that is also probably having an impact," he added.

The plunge in July IIP was mainly due to slowing in the interest sensitive capital goods and consumer durable segments, besides slackening in manufacturing and mining sectors.

The chief economic advisor further said the world is in a very difficult situation in which interest rates are dismally low in developed countries and very high in emerging economies.

While India is maintaining a higher interest rate regime, Basu said certain emerging economies like Turkey have succeeded in checking inflation by lowering interest rates and simultaneously achieving high GDP.