Amid escalating tension between the Union Finance Ministry and Reserve Bank of India over Budget proposals such as setting up of an independent Public Debt Management Agency (PDMA) and amendments to the Finance Bill taking away RBI powers to regulate g-sec trading, Finance Minister Arun Jaitley said on Sunday that there was no “disconnect” and the two were engaged in free and frank discussions.
RBI Governor Raghuram Rajan too asserted that the proposed PDMA was desirable and would be a professional organisation independent of the bank and the government.
“There has always been and shall continue to be regular and continuous interaction between the central bank and the government. We have completely free and frank discussions and therefore there is no issue of a disconnect. I have routinely clarified that,” Jaitley said after a post-Budget meeting of the Central Board of the RBI.
The ministry and RBI have had differing views on the PDMA, regulation of g-sec trading and the composition of a monetary policy committee. The RBI feels the committee will be skewed in the government’s favour if it has more members from outside than from within the central bank.
The Finance Bill, for its part, proposes to amend Sections 45U and 45W of the RBI Act. While the 45U amendment would take away the RBI’s powers to regulate interbank repo and reverse repo rates, the 45W amendment would shift the regulation of g-secs and money market instruments to SEBI.
Backing the PDMA Sunday, Rajan said, “It puts some discipline on the government debt process and also frees regulation of the need to create some sort of financial impression… The concept is a worthwhile move. As announced in the Budget, the notification will take place at an appropriate time.”
While the RBI has not opposed the PDMA, it does not want its operationalisation immediately because the government is struggling to keep its fiscal deficit under control.
On the Monetary Policy Framework Committee, Rajan said the details would be worked out soon, stressing that inflation would continue to be the primary factor for future rate cuts by the RBI. “While the external environment is a constraint, a lot of what we need to do has to do with the internal environment,” he said.
While adding that the Federal Reserve may take a little longer to raise interest rates, Rajan added quickly, “that (Fed rate hike) can’t be the primary factor. The primary factor in allowing for greater monetary easing will be the pattern of inflation and how that proceeds”.
The RBI is scheduled to hold its first monetary policy review for 2015-16 on April 7.
Asked about the impact of the unseasonal rains and hailstorms on farm output and inflation, Rajan said, “As far as the rains go, there is no direct one-to-one correlation between rains and prices. It depends on what crops (are impacted). But we have to be more careful in food management.”
He further said that the government is looking at food prices and is engaged in food management.
Jaitley expressed the hope that banks would soon transmit the 50 basis point cut in short term lending rates by the RBI. “We do not put pressure on them. We only expect and our expectations come true,” he said.
Commenting on the government’s fiscal consolidation roadmap, Rajan said it had taken a number of steps and much would depend upon the external and internal environment, especially the disinvestment programme which is dependent on the markets.
“The fiscal deficit also depends on the actions of the state governments,” he said.
The Centre aims to bring down its fiscal deficit to 3.9 per cent of the GDP in 2015-16, from 4.1 per cent in the current fiscal, delaying its fiscal consolidation plan by a year to increase public spending, in the hope that it would boost growth.
The 17-member RBI Central Board comprises Rajan, four Deputy Governors, nominees from the Finance Ministry, industry representatives and other experts. It is customary for the Finance Minister to address the board after the presentation of the Union Budget.