RBI Governor Urjit Patel’s revelation in the post-policy review press conference that the members of the MPC unanimously declined to meet the Finance Ministry panel for discussions on the monetary policy before the monetary policy review, has brought the rift between the central bank and North Block out in the open.
“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. Chief Economic Advisor Arvind 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.
Although the RBI Act does allow the government to send its views to the MPC, this was the first time when North Block had formally asked to meet the MPC members ahead of the policy review to give its inputs.
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 Finance Ministry has expressed its reservations over the RBI changing its monetary policy stance from ‘accommodative’ to ‘neutral’ while keeping policy rates on hold in its February review. While RBI chose to maintain status quo on key policy rates, North Block had already made it clear that in the backdrop of falling inflation and growth in Gross Domestic Product (GDP), there was a strong case for a substantial easing of rates.
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In a statement issued Wednesday evening, Subramanian said that deceleration in growth and falling inflation warranted a 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,” Subramanian said.
On Wednesday, the RBI left the repo rate unchanged at 6.25 percent and the reverse repo rate at 6 percent. The central bank also projected that inflation will remain in the 2 to 3.5 percent range for the first half of 2017-18 and in the 3.5 to 4.5 per cent for the second half. The RBI in its monetary policy review also cut growth projection for current fiscal to 7.3 per cent from 7.4 per cent.
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, interest rate regime, the estimate of growth and fiscal stance were the main areas of difference between the UPA government and the RBI.