Top economists agree more rate hikes will not check inflation

India?s top economists have broadly agreed that further interest rate hikes by RBI will not check price rise. They met at a closed door session last week to figure out if they were missing some trick because of which inflation was just not coming down from double digits.

Speaking at a session organised by the National Institute of Public Finance and Policy, the chief economic advisor in the finance ministry, Kaushik Basu, said it was instead possible that a cut in interest rates could actually reduce inflation.

In the meeting with senior officials from the Planning

Commission, finance ministry, Reserve Bank of India, economists from universities and research organisations and representatives of IMF, World Bank and the ADB, Basu cited the case of Turkey where interest rate reduction had reduced inflation.

The persistence of the headline inflation at near double digits despite 12 sustained increases in the policy interest rate by RBI since April 2009 has been a frustrating experience for policy makers. It is at 9.78% at the end of August, the highest rate in more than a year. The experts expect to take the lessons from the meeting to dovetail inflation management across government and non-government agencies.

The trigger for this unusual meeting had come from Govinda Rao, member of Prime Minister?s Economic Advisory Council and Basu. They both concurred in the run-up to the meeting that the country?s economic managers have not fully grasped what is making inflation sticky.

Mihir Rakshit, speaking at the meeting, said the current inflation is being pulled by a general rise in food prices, as supply from the farms has not kept pace with the rising demand. P Balakrishnan and Ramesh Chand also agreed with him.

Economists were agreed that food price increases point to the urgency of medium term measures to make agriculture more efficient. A related problem is the non-availability of key high frequency data on output gap, employment, wage rate and stuff like deseasonalised price indices which makes inflation analysis difficult to handle.