RBI urged to re-look tight money policy as industry output dips

With hardening interest rates impacting consumer demand, the Chief Economic Advisor (CEA) to the Finance Ministry, Dr Kaushik Basu, on Friday virtually called the Reserve Bank of India to re-look its tight monetary stance.

“The RBI will have to balance its monetary policy tightening in view of growing concerns, particularly in consumer goods front, where higher interest rates are impacting demand,” Mr Basu told reporters here.

This comment comes less than a week before the central bank is to hold a mid-quarter review of its monetary policy. As part of its anti-inflation measures, the RBI has raised its key policy rates nine times since March 2010.

According to the latest Index of Industrial Production (IIP) data, the output in the consumer goods sector slowed to 2.9 per cent in April 2011 from 13.8 per cent in the year-ago period.

Even as there are fears of economic growth moderation, the RBI is widely expected to raise policy rates as part of its current tight monetary stance to tame inflation. The central bank may, however, desist from an aggressive increase (last time it went in for 50 basis points hike) given the slowdown in industrial output in April this year.

India's April 2011 industrial output grew 6.3 per cent compared with 13.1 per cent a year ago period, on account of poor showing in consumer goods, manufacturing and mining sectors.

Concerned over the falling industrial growth rate, the Finance Minister, Mr Pranab Mukherjee, told reporters today that “the IIP growth figures are disturbing. We need to wait for the longer-term IIP growth to see the trend”.
Factory output numbers

Meanwhile, the growth in factory output numbers for the fiscal 2010-11 has been revised upward to 8.2 per cent in the new series (with base as 2004-05) from 7.8 per cent projected in the series with 1993-94 as base year. Dr Basu said there will be a marginal upward revision in 2010-11 GDP figures following change in IIP growth for that year.

“There will be a small upward revision in 2010-11 GDP growth figure due to change in IIP growth. We are in the midst of re-calculation of our growth prospects. We will be able to come out with clear assessment by the end of the month,” Dr Basu said.

On the diesel price hike, Dr Basu said that the government should soon take a decision in this regard.

“We are committed to our fiscal consolidation target. We don't want to divert from it. We will very soon have to take stock of diesel prices,” Dr Basu said.