Standoff over rates: RBI panel said no to meeting with Finance Ministry before review

Central bank resists, doesn’t cut; Govt says there’s strong case for easing rate

Written by Khushboo Narayan , Sunny Verma | Mumbainew Delhi | Updated: June 8, 2017 8:40 am
RBI, Central government, Repo Rate Mumbai: RBI Governor Urjit Patel during a press conference announcing the Reserve Bank of India’s monetary policy at its headquarters in Mumbai on Wednesday. PTI Photo by Mitesh Bhuvad

The government and the Reserve Bank of India squared off Wednesday on the issue of lowering interest rates. Hours after the Monetary Policy Committee (MPC) decided to keep the rates on hold, the Finance Ministry made it clear that there was a strong case for a substantial easing of rates. The statement by Chief Economic Advisor Arvind Subramanian came after RBI Governor Urjit Patel said that members of the MPC — the interest rate setting committee – unanimously declined to meet the Finance Ministry panel for discussions on the monetary policy a week before the monetary policy review.

“The meeting did not take place. All MPC members declined the request of the Finance Ministry for that meeting,” Patel said. Sources said senior Ministry officials had scheduled a meeting with members of the MPC on June 1, which was later declined by MPC members. Subramanian, Principal Economic Advisor Sanjeev Sanyal and the Economic Affairs Secretary were to meet the MPC members to present the government’s viewpoint on the state of the economy.

On Wednesday, the RBI left the repo rate unchanged at 6.25 per cent and the reverse repo rate at 6 per cent. The central bank also projected that inflation will remain in the 2 to 3.5 per cent range for the first half of 2017-18 and in the 3.5 to 4.5 per cent for second half. The RBI in its monetary police review also cut growth projection for current fiscal to 7.3 per cent from 7.4 per cent. The MPC decision not to change the key policy rate — the repo rate or the rate at which banks borrow from the central bank — comes in the backdrop of the pre-policy meet sought by the Ministry which was perceived by some experts as an interference in the functioning of the MPC. So far, interactions between the Finance Ministry and the RBI ahead of the monetary policy review have been limited to customary meetings between the Finance Minister and the Governor.

The Ministry has had reservations over the RBI changing its monetary policy stance from “accommodative” to “neutral” while keeping policy rates on hold in its February review. In the backdrop of falling inflation and growth in Gross Domestic Product (GDP), the Ministry is of the view that there is need for further monetary policy easing. In a statement issued Wednesday evening, Chief Economic Advisor Subramanian said that deceleration in growth and falling inflation “warrants substantial monetary policy easing”. “…At the same time, real policy rates are tight and rising, at a time of low inflation and slowing growth. Of course, the appreciating real exchange rate makes the real monetary policy conditions even tighter. In recent times, seldom have economic conditions and the outlook warranted substantial monetary policy easing.”

A senior official of the Finance Ministry told The Indian Express: “Since one month, we have had discussions with the Finance Ministry on sending the government’s views to the RBI. We were trying to fix a meeting with MPC members that did not happen ultimately. The Finance Ministry had sent written views to the RBI on interest rates before the policy and law does state that the Finance Ministry can send its views to RBI.” The RBI Act allows the government to send its views to the MPC.

The government did not specify the quantum but clearly argued that they wanted the RBI to cut rates, the official said. Going ahead, the government plans to prepare a framework for its meetings with the MPC members. “We are also discussing whether minutes of this meeting, between government officials and MPC members should be made public, on the lines of the MPC minutes being made public,” the official said.

The six-member MPC of the RBI headed by Patel was jointly formed by the government and the RBI in September 2016 to determine interest rates and make monetary policy decisions more transparent. The MPC has three external members — Chetan Ghate, Ravindra Dholakia, and Pami Dua — and three members from the RBI —Governor Patel, Deputy Governor Viral Acharya and Executive Director Michael Patra.

This was the first time when the Finance Ministry panel had formally asked to meet the MPC members ahead of the policy review to give its inputs. Earlier on May 31, Subramanian in an interview to business daily Business Standard had said the RBI Act provides for the central government to give its views to the committee and the Finance Ministry panel is just “consistent” with the law. “Remember these are inputs, we don’t pressurise them (MPC). They are free to take our views into consideration or not. We will meet them before monetary policy meetings to present our opinions,” Subramanian had said.

This is not the first time when the government and the RBI have disagreed on the issue of lowering the interest rates. Between 2008 and 2013, during the tenure of Duvvuri Subbarao, the former RBI Governor, the interest rate regime, estimate of growth and fiscal stance were the main areas of difference between the UPA government and the RBI.

Globally, a number of countries have formed monetary policy committees with the main objective of inflation targeting. In the case of Bank of England, the central bank of UK, a representative from the Treasury is allowed to sit in the monetary policy committee meetings. While the Treasury representative can discuss policy issues, he or she is not allowed to vote. The purpose is to ensure that the MPC is fully briefed on fiscal policy developments and other aspects of the government’s economic policies, and that the Chancellor is kept fully informed about monetary policy.

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  1. P
    Prasanta Mishra
    Jun 8, 2017 at 11:55 am
    Nautanki at its best.
    Reply
    1. A
      AKB
      Jun 8, 2017 at 9:57 am
      This Governor is jokingly strict and we know his jokes during demonitization.
      Reply
      1. R
        ram
        Jun 9, 2017 at 5:35 am
        Sab-kuchh loota ke hosh main aye to kya kiya?This NOTBANDI will always keep running after the Governor
        Reply
      2. M
        Manas Sarkar
        Jun 8, 2017 at 9:53 am
        Every govt has their own policy, and RBI must follow it. If their members are not interested to meet finance ministry people, I think govt must change such members. If any financial problems arise in the country, these members will not take responsibility but the govt will have to take. If they have something to say, they must meet the govt and clarify it, rather than avoiding meeting...
        Reply
        1. A
          arc
          Jun 8, 2017 at 1:11 pm
          Hello Mr Sarkar, like a true chaddi you are an ignorant f00l. First learn the difference between money and finance. Managing the first is RBI's job. Managing finance is that 1d1ot Arun Jaitley's job. The two are different jobs. But 1d1ot Jaitley like you knows nothing about finance, which is controlled through fiscal policy, the disastrous demonetisation was one such policy of Butcher S.0.B Modi who forced RBI to implement it after Raghuram Rajah refused to do so. RBI manages the country's money through interest rates and printing money. Pick up a few books on the subject before you comment. Don't be like the uneducated Modi who mercifully doesn't open his mouth much. BEcause everytime he opens it he displays his ignorance and lack of education. Mr Sarkar you are showing the same trait.
          Reply
          1. R
            ram
            Jun 9, 2017 at 5:39 am
            It means you want all the power of the Governor be transferred to the peon of the Finance Ministry .Very good suggestion from SARKAR TO SARKAR
            Reply
          2. S
            sundaram
            Jun 8, 2017 at 9:37 am
            Jaitly and his Economic Advisor Arvind Subramanian had ruined Indian Banks especially PSU Banks. They blindly think that do out more and more loans at low interest rates to Business who are in no capacity or mood to improve production or productivity, had defaulted on loan repayment to the tune of 13 lakh Crores. Loan amount defaulted had boosted BlackMoney circulation and is pushing the price of essentials and real Estate. NPAs had pushed several PSU Banks to the border of closing down their operation. Besides in the past three years because of drastic reduction on deposit interest from 9.5 to 6.5 interest had affected crores of non pentioners. In developed countries savings are not encouraged as Govt offers social welfare benefits to everone, especially to old which is not the case in India. Arvind Subramanian is trying to copy the same without any thinking.
            Reply
            1. E
              Eve Fernandez
              Jun 8, 2017 at 12:38 pm
              You are right. What can we expect from a government that stands by business who want to lay hands on public money with banks. With so many interest cuts during the tenure of this government can they shown any effect on positive growth? This govt has been foo common people. When will the people wake up? This govt reminds me about a story of a seller who went to a village to sell monkeys. Hope you all know the story what finally happened.
              Reply
            2. H
              HARI KISHORE PRASAD
              Jun 8, 2017 at 9:34 am
              RTI IS AN AUTONOMOUS BODY,AND SHOULD BE ALLOWED TO WORK AND TAKE DECISION INDEPENDENTLY. It should be free from political interventions.
              Reply
              1. A
                Anand Ch
                Jun 8, 2017 at 7:29 am
                It is mere foolishness to think lower interest would boost up economy. In a country like India where people try to default, interest rates only helps more NPAs.
                Reply
                1. E
                  Eve Fernandez
                  Jun 8, 2017 at 12:39 pm
                  Correct
                  Reply
                2. L
                  l s
                  Jun 8, 2017 at 6:56 am
                  Everybody knows very well that the RBI is acting under the thumb of the Finance Minister. No use shouting now. You have lef the nation down.
                  Reply
                  1. K
                    kulaputra kulaputra
                    Jun 8, 2017 at 6:15 am
                    RBI is being stubborn. Keeping rates at 6 when inflation is at 3 is making sure that other countries become more compe ive than us. Debt is a legitimate way of financing. Just because there was crony capitalism in the past, it is wrong to deny debt capital - working or otherwise to many small and medium industries. Fix the problem of crony capitalism and wilful defaulters and not by kil SMEs which as everyone is aware is the backbone of any economy, Stop thinking long term and start thinking short term. In the long term, we are all dead.
                    Reply
                    1. E
                      Eve Fernandez
                      Jun 8, 2017 at 12:43 pm
                      The very concept of linking interest rate to inflation is wrong for a country like India. Banks have primary duty to take care of interests of depositors i.e maximize their income. Interests of borrowers in secondary. Borrowers (read capitalists, business) want cheap money to squander rather than increase their quality of products, productivity and competivity.
                      Reply
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