With eyes set on the Reserve Bank of India's policy statement on Friday, World Bank's chief economist for the South Asia region, Kalpana Kochhar, says taming inflation is a bigger challenge in India than boosting growth.Our chief economic advisor, Kaushik Basu, had suggested the RBI think out of the box, citing the example of Turkey, which reduced interest rates despite high inflation and succeeded in boosting growth and curtailing inflation. Do you agree?
Turkey has been experiencing major capital inflows. Capital inflows are responding to high interest rates and this is complicating their macro-economic management. Credit growth has been very high.
One of the ways to discourage capital inflows is to lower interest rates. This is not the situation in India. India is not experiencing very huge capital inflows. And, even when it does, these flows are not sensitive to interest rates.
The Indian debt market is not very open to foreign capital flows. Most of the inflows come through the stock market. Also, credit growth is not terribly high in India. It is in the 20 per cent range. Therefore, the parallels between Turkey and India are not obvious to me.
Inflation in India shot up to 9.78 per cent in August. There is a debate whether RBI should continue with its policy of raising rates or not, since its monetary squeeze is hurting growth. What is your take?
Inflation is awfully close to 10 per cent, double digits. The main concern is that it has persisted at that level for a long time. The RBI would have to take that persistence into account, suggesting that it is still a problem and vigilance is still required on inflation.
We also have some information that industrial production is moderating, although it is one month of data (July)