RBI should be more experimental in monetary policy: Basu

A week ahead of the monetary policy review by RBI, World Bank Chief Economist Kaushik Basu today called for an "experimental" approach to the interest rate setting process.
"Monetary policy is a very cloudy area and I have felt that we should be more experimental," the former chief economic adviser to the government said here.
RBI Governor Raghuram Rajan, a monetary economist who is considered an inflation hawk, will announce the first bi-monthly monetary policy review of the new fiscal on April 5.
The policy comes amidst inflation remaining under control and the Budget sticking to the previously set fiscal roadmap. It also comes within weeks of government slashing small savings rates by up to 60 bps, which will help banks bring down deposit as well as lending rates.

Basu was addressing an Asia Society event organised to discuss his latest book 'An Economist in the Real World: The art of policymaking in India' that deals with his days in the Manmohan Singh government as the chief economic advisor.
"I think RBI should have been a bit more liberal and not respond to inflation by raising interest rate the way we traditionally do," he said, arguing that no one has a sure answer to most macroeconomic and monetary policies.

Describing monetary policy as a "hit and miss technique unlike other domains of economics", he said one does not quite know the outcome as there is no ultimate theory of understanding monetary policy unlike other areas of economics where the theory gives a very deep understanding of how to do things right.

Advising the RBI against following what its Western counterparts do, he said traditionally it has been adopting a policy of following the US Fed or Bank of England.
On inflation targeting, Basu said, "Inflation targeting is worthwhile but you have to remember that the instruments you have for it are very cumbersome. We also don't know quite well as to which instrument will work and which will not work."
He discounted media reports on conflicts between North Block (Finance Ministry) and RBI, saying the central bank is fairly autonomous. "Among emerging economies, the relationship between the RBI and the government is pretty good," he said.

He, however, agreed with Rajan on the need for more coordination in global monetary policy, saying, "There is a huge need for some global coordination of not just monetary policy but the overall policies."
Rajan has made many public calls for more coordinated approach between major central banks, saying what one major central bank does has more impact outside its domain than within. His latest call came earlier this week in an article.