RBI panel snubs government on rate meet

New Delhi/ Mumbai: The RBI’s monetary policy committee (MPC) had asserted its autonomy and unanimously turned down the Union finance ministry’s invite for a discussion ahead of the panel’s policy review meeting, RBI governor Urjit Patel said on Wednesday. This is being seen as the start of a confrontation between the ministry and the central bank.

The development comes amid reports that the ministry is unhappy with Mr Patel for not cutting interest rates as aggressively as the government would have wanted the MPC to.

Relations between Mint Street and North Block have often been frosty, with the former’s calls for lowering rates being the biggest point of difference. The government has gone public on several occasions on its expectations from the RBI’s policies ahead of reviews. Upping growth is the dominant expectation for the government, but the RBI is guided more by inflation worries in its actions.

“The meeting did not take place. All the MPC members declined the request of the finance ministry for that meeting,” Mr Patel said.

The RBI governor was responding to a question, whether the ministry move to call for a meeting curbs the Central bank’s independence and damages the MPC’s credibility.

Interestingly, the MPC on Wednesday again did not cut interest rates citing risks to inflation due to a spurt in farmloan waivers by certain states. It maintained its key interest rate at 6.25 per cent for its fourth successive monetary policy review, dashing the government’s hopes of a reduction.

India’s chief economic adviser Arvind Subramanian reacted by saying that a substantial monetary policy easing was warranted in the current macroeconomic situation. “In recent times, seldom have economic conditions and the outlook warranted substantial monetary policy easing (rate cuts),” he said.

Mr Subramanian said inflation has been running well below the target and the real economy growth has decelerated from last July. “Inflation forecast errors have been large and systematically one-sided in overstating inflation,” he said.

On the government calling MPC members for a meeting, Mr Subramanian said, “The more discussion we all have, the more the government can provide inputs. It will only enrich the debate.”

The MPC is a six-member panel headed by the RBI governor and members nominated by the Centre (three members) and the central bank. It takes decision on interest rates in the country. Earlier, interest rates were solely decided by the RBI governor through internal discussions.

Many analysts had seen the ministry’s summons to MPC members as an interference in the independence of the committee.

Typically, governments around the world want interest rates to be low as it spurs growth. However, there are systematic risks for keeping interest rates low for long periods like high inflation and formation of assets bubbles like those during the financial crisis of 2008.  

According to reports, the ministry had called for separate meetings with the three external members of the MPC nominated by the government and the RBI representatives on the committee. The government was to be represented by economic affairs secretary Tapan Ray, Mr Subramanian and principal economic adviser Sanjeev Sanyal.

The purpose of the meeting was said to be to present the Centre’s views regarding inflation and growth for the MPC to consider before the monetary policy review. Before the MPC was set, the RBI governor used to pay customary visits to the finance minister on the eve of a policy review.  

The government nominees on the MPC are Indian Statistical Institute professor Chetan Ghate, Delhi School of Economics director Pami Dua, and IIM-Ahmedabad professor Ravindra H. Dholakia. RBI governor Mr Patel, deputy governor Viral Acharya and executive director Michael Patra represent the apex bank on the committee.

While the government nominates members on the MPC, rules are framed in such a way that they are supposed to be independent. The government-appointed members are nominated for four years and cannot be re-nominated.