Outgoing Chief Economic Adviser (CEA) Kaushik Basu, who had earlier differed with the Reserve Bank of India (RBI) on its tight monetary stance, on Tuesday described the central bank's decision on keeping the repo rate unchanged as the “right move”. He, however, prescribed that RBI go for rate cuts in the medium to long term.
In his last media interaction as CEA in the ministry of finance (his extended term ended on Tuesday), Basu said RBI, through a one percentage point cut in the Statutory Liquidity Ratio, had given space to banks to lend more to the private sector.
Earlier, when RBI had been in a tight monetary stance to contain inflation, Basu had cited the example of Turkey, which despite a high rate of price rise had lowered interest rates and succeeded in boosting growth and lowering inflation. on Tuesday, he said there might have been occasions when he had differed with RBI but the central bank's move on Tuesday was a step in the right direction.
RBI cited high inflation as a reason for not lowering the repo rate, even as economic growth came down to a nine-year low of 6.5 per cent in 2011-12.
Separately, outgoing economic affairs secretary R Gopalan said, “Managing growth and inflation will be very crucial in the coming months.” Planning Commission deputy chairman Montek Singh Ahluwalia said RBI had taken a slightly cautious stance because of its concern that inflation was sticky. “They (RBI) are looking (at a situation) that if the monsoon does not improve, then there may be some pressure on that (inflation) front. There is no harm (in) being a little cautious on this," he added.
Basu said he expected inflation to go below seven per cent in September, but said it would again rise, due to the base effect and the impact of deficient rainfall.
Adding: "RBI is treading this difficult path (growth slowdown). We do know that keeping a tight control over liquidity makes growth difficult but on the other hand, they have to worry about inflation. My own recommendation would be that we should, in the medium to long term, begin to ease up on the interest rates but at this point of time, what was done to wait and watch was correct."
On the central bank lowering SLR by one per cent to 23 per cent, Basu said, “SLR reduction will create space for banks to move over to private lending and the direction is being indicated is that we want the private sector to borrow more easily and invest."
He predicted a sub-six per cent growth rate for the first two quarters of this financial year, “which should hopefully pick up in the second half”.
Diesel price rise question of timing
Kaushik Basu on Tuesday said the government would wait for the right time to take a call on a diesel price increase. “You have to look at the international price situation and the drought-like situation which is putting pressure on food prices,” he added.
On foreign direct investment in multi-brand retail he said, “There are certain things in policy which you know are imperative. You have to ultimately go for it.” On the protests by the civil society regarding corruption, Basu said, would put pressure on the government to do something, but a blueprint to deal with the issue was not possible without professionalism. On the issue black money abroad, he said the government had to be careful, as many Indians were keeping funds in foreign companies for legitimate activities. “If you begin fear mongering (to) bring illegal money stashed abroad, you will bring legitimate business to a halt. Growth will come to a halt.”