Reserve Bank of India (RBI) governor, Raghuram Rajan, cautiously backed a government plan on Sunday to hand over public debt management to a new agency, as the two sides played down reports of friction over the biggest regulatory shakeup in a generation.
“A public debt management agency as a professional organisation, independent of the (central) bank, independent of the government, is something that is desirable,” Rajan told a joint news conference with Finance Minister Arun Jaitley.
However, Rajan emphasized that details of how the new agency would operate still have to be worked out.
“Besides time and the nature of resources it uses, how it works with the central bank and with the government, those are all details that the government is working to fill out. Those are the things that have to be determined,” Rajan said.
Jaitley denied any “disconnect” with the central bank over the changes proposed in the budget, which also include setting up a monetary policy committee.
He said all the changes had been proposed with the central bank before being included in legislation known as the finance bill, which is due to be voted on by parliament in April.
Finance ministry sources told Reuters earlier this week that officials at the Reserve Bank of India had reservations about the proposals.
No disconnect between RBI and government: Arun Jaitley
Scotching murmurs of differences between the government and the RBI over regulation of money market, Finance Minister Arun Jaitley today said there is no ‘disconnect’ between the two and hoped banks would follow the central bank in reducing interest rates.
Jaitley, who addressed the RBI board on his proposals in Budget for 2015-16, said there have been regular interactions and the government often takes opinion and suggestions of the central bank.
On the possibility of future interest rate cuts, RBI Governor Raghuram Rajan said it would depend on the pattern of inflation and added that the central bank would carefully watch the impact on unseasonal rains and hailstorm on the price situation.
“We have complete free and frank discussions and therefore there is no question of any disconnect… between the bank and the government, I have repeatedly clarified that,” Jaitley told reporters after the meeting.
Jaitley in his budget had proposed to shift powers to regulate trading in government bonds from RBI to capital market regulator Sebi.
“As far as proposals in the Finance Bill are concerned they are before Parliament. Some of them we discussed earlier, we discussed them even now …I don’t wish to comment at this stage,” he said.
He further said that discussion between the government and the RBI always continues. “They (discussions) have been before the budget and have taken place after the budget as well,” he said.
When asked whether banks would be pressurised to pass on rate cuts to consumers, Jaitley said the government doesn’t put pressure but hopes and it is hopeful that they would do it in line with the RBI policies.
Jaitley said, “We do not put pressure on them. We only expect and our expectations come true.”
Despite RBI cutting short-term lending rates by 0.50 per cent in quick succession, banks have yet to reduce lending rates for borrowers.
As far as future rate cut by the RBI is concerned, Rajan said it would primarily depend on the domestic price situation and partly on global factors, especially hike in rates by the Federal Reserve.
“While external environment is a constraint, a lot of what we need to do has to do with the internal environment,” he said adding that the Federal Reserve may take a little longer to raise interest rates.
However, he added, “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.”
On the impact of unseasonal rains and hailstorm on farm output, Rajan said, “As far as rains go, there is no direct one-to-one correlation between rains and prices. It depends on what crops (are impacted).
“What it means is that we have to be more careful in food management and government has repeatedly said it is looking at food prices and is engaged actively in food management. It needs greater vigilance.”
Answering questions on the fiscal deficit situation, Rajan said, the government has 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.
“It (fiscal deficit) also depends on the actions of the state governments. So, we have to look at all these to see how much fiscal consolidation is happening over the course of the year given the intent that has already been expressed,” he said.
The government proposes to bring down the fiscal deficit to 3.9 per cent of GDP in 2015-16 from 4.1 per cent estimated in the current fiscal.
The 17-member RBI Board comprises of Governor Raghuram Rajan, four Deputy Governors, nominees from Finance Ministry, industry representatives and other experts.
On Public Debt Management Agency, Rajan said it should be a professional organisation, independent of the central bank and government, “that is something that is desirable.”
“Because it puts some discipline on the government debt process and also frees regulation of the need to create some sort of financial impression,” he said.
Precise time, nature of resources it uses, how it works with the central bank and the government — these are all the details that a panel is working to fill out, he said.
“These are things which are to be determined. So, I think as a concept and enabling that concept is a very worthwhile move,” he added.
When asked about cut in expenditure on the social sector scheme, the Finance Minister said “actual expenditure on these sectors is on the increase. It is just that mode of expenditure has changed because of the recommendation of the 14th Finance Commission.”
A large part of the expenditure of these sectors is going to be undertaken by the central government and because of larger devolution to the states, the states are also going to additionally add to that expenditure, he said.
“Therefore, the overall expenditure in these sectors in this year would be much larger than any other year in the past and there would be significant increase,” Jaitley added.