RBI must rethink monetary policy: Basu

His comments come amid Indian corporates blaming the high interest rate regime for the decline in industrial output growth.

Industrial growth fell to 1.9 per cent in September this fiscal from 6.1 per cent in the year-ago period,mainly due to poor output from the manufacturing sector.

Basu’s comments were,however,in sharp contrast to the views expressed by Planning Commission Deputy Chairman Montek Singh Ahluwalia,who earlier in the day said that there was no connection between a high interest rate regime and slowdown in industrial growth.

“I would not draw any connection between the rate hikes and decline in industrial production. The rate today is roughly what it was when the economy was growing at 9 per cent,” Ahluwalia said when asked if RBI’s tight monetary policy was hampering industrial production.

The Reserve Bank has hiked policy rates by 3.75 per cent since March 2010 to tame inflation,which is hovering at around 10 per cent. The high interest rate regime has made credit expensive for corporates as well as consumers,which the industry says has hit the growth.

“The dilemma that we are facing and the RBI is facing (is that) there are two battles we have to fight — inflation and growth. It is a really hard balancing act that the RBI has to do,” Basu said.

The economic growth in the April-June period stood at 7.7 per cent,the lowest in six quarters. Driving at a correlation between the fiscal deficit target of 4.6 per cent of the GDP for 2011-12 and economic growth with inflation,he termed fiscal deficit as a “double edged sword”.

“If you now pull back on fiscal deficit very sharply,it has the same kind of effect as pulling down on liquidity really sharply. It curbs demand and so it is going to have an impact on growth first before it has an impact on inflation,” Basu said.

He said the deficit situation is difficult and the 4.6 per cent target may impact growth.

“Our target of 4.6 per cent (fiscal deficit) is something that we are striving for. (It is) very hard … to meet that target with a jarring sharp note. I am not very clear what it is going to do for the growth,” he said.