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  3. Lower interest rates can control inflation: Kaushik Basu

Lower interest rates can control inflation: Kaushik Basu

19 Sep 2011 Evaluate

Stating that the high interest rates has limited role in controlling inflation, the Chief Economic Advisor Kaushik Basu has advocated for reducing the interest rates to maintain the momentum of growth in the economy. ‘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,' Kaushik Basu said.

Last week, in order to control inflation, the Reserve Bank of India, hiked its short term lending and borrowing rates, by 25 basis points, this was 12th hike in last one and half year. However, headline inflation, has been hovering around two digit mark from the last few quarters.

Stating need for different approach to tackle inflation Kaushik Basu said, 'so try something different, on which we are beginning to get evidence.’ He said this with reference to Turkey, which had mange to control inflation by reducing interest rates. '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,' he added.

Kaushik Basu expects inflation to come down by middle of 2012, however, RBI in its midterm quarterly review has indicated that inflation to moderate to 6-5% by second half of current fiscal. The headline inflation for August surged to 9.78% from 9.22% in July. On RBI’s strategy in controlling inflation he said, the Reserve Bank needs to think out-of-the-box and come out with steps to tackle high inflation.

Basu expects India to grow by 8.1% in the current financial year, provided, eurozone crisis does not become recession. On the policy front, he expects that Direct Taxes Code (DTC) will replace the Income tax Act 1961 in current financial year. However, for Goods and Services Tax (GST) he said, 'I don't think GST will happen in April, 2012.'

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