On rates,Kaushik Basu backs RBI

'The world is going through difficult times and it is imminent that GDP would slow down'

Written by Agencies | New Delhi | Published: July 31, 2012 5:28:59 pm

Describing the RBI decision of not cutting key interest rates to check price rise as the ‘right move’,outgoing Chief Economic Advisor Kaushik Basu today the expressed hope that inflation would come down to below 7 per cent in September.

“My expectation is that inflation in the month of September will go below 7 per cent,” he said while commenting on the RBI decision to keep interest rates unchanged for the second time in a row.

The central bank,however,lowered the Statutory Liquidity Ratio (SLR) — the amount of deposits banks park in government bonds — by 1 per cent to 23 per cent.

“RBI has said pause. RBI has made a right move and the lowering of SLR is a very important small move (will) give right indication,” Basu said.

On economic growth,he said that the world is going through difficult times and it is imminent that GDP would slow down in the first two quarters of the fiscal.

“In the first two quarters (April-June,July-September),growth will remain below 6 per cent. Hopefully there will be a pick up after that,” Basu said,adding that the government needs to bring in fundamental changes and move forward to achieve high growth momentum.

The Wholesale Price Index-based inflation,at 7.25 per cent in June,is much above the RBI’s comfort level of 5 per cent. Besides,retail inflation too remains at the elevated level of 10.02 per cent.

Economic growth has slowed to nine-year low of 6.5 per cent in the 2011-12 fiscal,and 5.3 per cent in the January- March quarter. RBI lowered the growth forecast for the current fiscal to 6.5 per cent from 7.3 per cent earlier.

In his last media interaction as CEA in the Ministry of Finance,Basu said that there should be some easing of interest rates in the medium to long term. Basu is retiring today.

Basu said,”RBI is having to tread 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 SLR reduction,he said the decision would create space for more private sector borrowing as investment is going down.

“SLR reduction will create space for banks to move over to private lending and for the future and as the direction is being indicated is that we want the private sector to borrow more easily and private sector to invest,” Basu said.

RBI in its Macroeconomic and Monetary Developments report released yesterday had said that there was a need to provide investment stimulus to increase private sector investment in infrastructure.

It had said that sustained fall in investment has impacted India’s growth potential and there is a need to improve the investment climate by ‘moving quickly’ to clear

bottlenecks in infrastructure and removing constraints on Foreign Direct Investment (FDI).

Prime Minister Manmohan Singh has already set an investment target of at least Rs 2 lakh crore for core sector projects in the current fiscal in a bid to revert to 9 per cent economic growth.

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