Economists divided on impact of rate hikes on India’s growth

September 20th, 2011 - 12:59 pm ICT by IANS  

Kolkata, Sep 20 (IANS) Economists have started to question the hawkish stance of India’s central bank that has seen as many as 12 rate hikes in the past 20 months, and some feel the steps have hampered the growth of sectors that have not contributed to inflation.

But others see no long-term link between inflation and growth and back the rate hikes.

“The monetary policy (of the Reserve Bank of India) is becoming completely ineffective. Neither is it controlling inflation, nor promoting growth,” said Ajitava Raychaudhuri, professor of economics at Jadavpur University.

“Growth is being affected due to the increase in repo rate. It is hampering growth in
manufacturing and service sectors but these sectors are not at all responsible for the rising inflation for the last one year,” Raychaudhuri told IANS.

Dipankar Dasgupta, former professor of economics at the Indian Statistical Institute (ISI), echoed Raychaudhri’s views and said there was a possibility that high interest rates were affecting growth.

“I see there is high rate of interest and manufacturing growth is declining. And hence there is a possibility of the high interest rate impacting the overall growth,” Dasgupta said.

Their comments came after the central bank opted to tackle high inflation over falling factory output growth and hiked the repurchase rate, or the interest the central bank levies on short-term borrowing by commercial banks, to 8.25 percent from 8 percent.

Simultaneously, the reverse repurchase rate, or the interest on short-term lending, was also raised to 7.25 percent from 7 percent, since the central bank felt inflation levels remained well above its comfort zone.

“I think the RBI is giving a wrong dose to cure the disease. It’s time to think if there is a relation between lending rate and inflation. If there was excess money, hopefully it would have gone down after the continuous increase in repo rate,” said Dasgupta.

“But we still have high inflation.”

According to Raychaudhuri, the reason for the current stubborn inflation was high food and petro-product prices, adding the effective short-term anti-inflationary measures will be the supply-side management of agricultural products.

He also maintained that successive rate hike were hampering credit flow to sectors such as steel and construction, resulting in low growth in them. services and manufacturing were key to overall growth, the apex bank could actually lower rates for them.

Economists like Sugata Marjit, director and professor of economics at the Centre for Studies in Social Sciences here, gave a varied opinion on whether the rate hike will impact on the country’s gross domestic product (GDP) growth.

“Effectively, there is no relation between interest rate and GDP growth. There is a misconception. In India, statistically, there is no relation between growth and the interest rate in the long-term,” Marjit said.

Added Bipul Malakar, professor of economics at Jadavpur University: “The economy will grow at the current rate of growth. There will be no substantial change in GDP growth. There might be some regional effects.”

Professor Marjit went on to also support the central bank’s monetary policy stance and said the steps were necessary to tame inflationary expectations since there was still excess liquidity in the market.

“There are bubbles in the real estate market. Total amount of consumer loan has also increased. There is excess foreign investment. So interest rate has to go up.”

(Mithun Dasgupta can be contacted at mithun.d@ians.in)

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