A recent press report said that the Department of Industrial Policy and Promotion has said that the strategy used by the RBI’s to control inflation is wrong. Reports said that the industry department has suggested an alternative to the central bank to control inflation.
Reports said that the central bank has raised its policy rates about 12 times in 18 months making car loan, home loans, personal loan and other loans expensive. However, the Department of Industrial Policy and Promotion, which complies and releases the WPI (Wholesale Price Index) data, believes that the strategy is wrong.
CNBC-TV18 learns that RP Singh, who is the DIPP secretary, had written to Deputy Subbarao the RBI Governor just before the central bank increased rates on September 16 and the letter made two points. It said that two thirds of inflation is due to commodities, which was caused by supply-side issues and global prices and any increase in rates will only compound the problem further.
The second point was that the RBI should look at alternative measures to tame inflation and this could be done by curbing speculative demand, which the RBI can do by increasing the risk weightage. However, if risk weightage is increased, then it will make banks’ lending to this sector unattractive. Kaushik Basu, the chief economic advisor has advocated for a pause as far as RBI’s rate hike is concerned. He had given the example of Turkey, saying that when Turkey reversed its tough monetary policy stand, prices came down.