One reason why the Monetary Policy Committee (MPC) could have declined a meeting with Finance Ministry officials on June 1, sources have told The Indian Express, is that the request came during the “silent” or “shut period” — a reference to the two-week period before the announcement of a policy when, traditionally, the Reserve Bank of India doesn’t engage with the public. That had been the practice from 2005 until last year, when the RBI had an advisory committee on monetary policy with the Governor being the sole and final arbirter of interest rates.
Such a rule, although informal, was aimed at ensuring that market-sensitive information wasn’t leaked, considering the impact that insider information on the direction of interest rates can have on financial markets. Finance Ministry officials, including Chief Economic Adviser Arvind Subramanian, have said the Ministry is well within its rights to provide its view on interest rates to the RBI. But where they may have erred, top former government and RBI officials said, is in trying to engage with an independent interest-rate setting committee in that sensitive period.
A former RBI official said it would have been kosher if senior government officials had met the RBI a month before the policy, or provided a written submission to the MPC and sounded them out on whether they would be willing to engage with the Ministry. The face-off is, in a way, also a reflection of the challenges in navigating the new framework of a Committee mandated to achieve an inflation target of 4% in the medium term. For any government, growth would certainly be an overriding objective. But unlike the days of an advisory committee, the MPC is accountable for delivering on the inflation target. As a former RBI official said: “The current stand-off could well be the fallout of such a formal agreement on containing inflation because the MPC is bound to look at that mandate more closely.”
In the pre-MPC era, sometimes, senior Ministry and RBI officials would meet in the weeks before the monetary policy, or the RBI Governor would meet the Finance Minister alone. But a decade ago, such differences on interest rates didn’t matter much in a stunted financial market when today’s key policy rate — the repo rate, or the rate at which banks borrow from the RBI — wasn’t relevant. Unlike now, when there is a bi-monthly monetary policy review — a practice begun by former Governor D Subbarao — there were just two annual policy reviews in April and October with limited engagement with the media and the markets. That has changed with the progressive opening up of financial markets, leading to greater engagement by the RBI. And the key policy rate is far more critical now.
In his book, Who Moved My Interest Rate? Subbarao says his meetings with Finance Ministers P Chidambaram and Pranab Mukherjee were different in their settings. Chidambaram would meet him alone — although occasionally, he would invite the Finance Secretary and the CEA to join for the last 10 minutes or so, and give his point of view, or “advice”, as he called it. Mukherjee was more formal — with all the secretaries in the Ministry and his advisers being present. “Mukherjee’s stance was straightforward — that the Reserve Bank should ease on interest rate to support growth. Chidambaram on the other hand was more nuanced. He believed that I should cut rates in acknowledgment of his efforts at fiscal consolidation and would assert his arguments more firmly and forcefully,” Subbarao has written.
He has added that despite disagreements, the meetings were always cordial. He has also referred to the government’s pet peeve then too — that the RBI was too cynical in its forecasts. He has cited an instance of Finance Secretary Arvind Mayaram saying at a meeting: “whereas everywhere… in the world, governments and central banks are cooperating, here… Reserve Bank is being very recalcitrant”. Such tensions are inherent in the relationship between governments and central banks. But where some senior officials fault the Committee this time is in what they perceive as shifting reasons on inflation.
“It is not clear what exactly the RBI is looking at sometimes, unless we get a detailed account of the MPC deliberations. But having undershot the inflation target, the monetary policy narrative this time and the final decision are at odds. And they have tied their hands having shifted from an accommodative stance to a neutral stance,” an official said, adding that on inflation forecasting, the central bank ought to do a better job.
An important reason for this, Subbarao had said, was data flaws. “I wish there was a single or simple explanation for getting forecasts wrong,” he wrote. There is a political dimension too, one senior official said. The RBI, having borne the brunt of criticism after demonetisation, may well have been inclined to stand its ground — and retrieve lost ground — and be seen to be asserting its autonomy. Experts concur the Ministry was within its rights to provide inputs to the Committee. But with an institutional arrangement to set interest rates in place, the government ought to take the decision in its stride, an official said.