Excessive use of monetary policy may stunt growth: Basu

Amid a flood of data, the government today said the overall economic picture looked healthy. At the same time, it warned that excessive use of monetary policy and deficit reduction could help lower inflation but might also result in slower growth.

“This is a hard balancing act; and just because we do not get regular data on unemployment, we cannot be cavalier about it and let unemployment rise,” Chief Economic Advisor Kaushik Basu said while releasing the first Monthly Economic Review here.

“The reason why there is no clear formula for the level of monetary policy and fiscal tightening and the level of inflation is because aggregate demand in the economy depends not just on what the government does but also on what ordinary citizens do,” he added.

Basu’s statement came a day after the Reserve Bank of India raised the repo rate, the rate at which it lends overnight funds to banks, by 25 basis points to 6 per cent and the reverse repo rate by 50 basis points to 5 per cent. Reverse repo is the rate at which the central bank mops up excess liquidity from the system.

RBI has raised key policy rates five times this year to tame inflation, which was estimated at 8.5 per cent in August. While several economists have lowered their inflation projection for end-March following the release of the new series for inflation based on the wholesale price index, Basu held to his earlier estimate of 6 per cent inflation at the end of December. He, however, said the inflation figures over the past three weeks had been “confusing”.