Lower interest rates can tame inflation: Kaushik Basu

Chief Economic Advisor Kaushik Basu has pitched for a reduction in interest rates to maintain growth, saying the RBI’s tight monetary policy has had limited impact and the time has come to try something different.

“… I believe that is something (reduction of interest rate) which ought to be considered. When you have high inflation, the central bank’s standard response is to increase the interest rate and my view is that we have done it. It had some impact, but not at the level which we had expected,” Basu told a news channel.

[caption id=“attachment_86465” align=“alignleft” width=“380” caption=“Constant hike in interest rates is damaging India’s growth story.Reuters”]  [/caption]

“So try something different, on which we are beginning to get evidence,” he said.

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He said this while referring to Turkey, which had managed to tide over the problem of high inflation by reducing interest rates. Basu’s comments came within days of the Reserve Bank of India (RBI) raising key interest rates by 25 basis points, the 12th increase in the last 18 months, to contain inflation, which has remained stubbornly close to 10%.

“We are in a new world. Many countries are facing this problem. We have to try a different policy, because we don’t want to damage India’s growth story,” Basu added.

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Asked when inflation was likely to come down to 6 to 5%, Basu said, “Not till the middle of 2012, unfortunately.“Headline inflation for August rose to 9.78%, its highest level in more than a year.The Reserve Bank, he said, needs to think out-of-the-box and come out with steps to tackle high inflation. On India’s growth in the current fiscal, he said, “I expect India to grow by 8.1% if the euro zone crisis does not become a recession.”

Basu also expressed hope that Direct Taxes Code (DTC), which seeks to replace the Income Tax Act, 1961, will come into force before April 1, 2012.

However, as far as Goods and Services Tax (GST) was concerned, he said, “I don’t think GST will happen in April, 2012.”

PTI