FM Arun Jaitley scotches govt-RBI disconnect rumours

By: and |
New Delhi | Published: March 23, 2015 1:11:06 AM

Raghuram Rajan favours keeping PDMA independent of government, Reserve Bank of India

Arun Jaitley, Raghuram Rajan, RBI, Reserve Bank of India, RBI Act, repo rate, monetary policyFinance Minister Arun Jaitley and RBI Governor Raghuram Rajan. (Express Photo by Ravi Kanojia)

Finance minister Arun Jaitley and Reserve Bank of India (RBI) governor Raghuram Rajan on Sunday sought to play down the reported differences between them following the proposed amendments to RBI Act, by which the central bank’s powers, to manage the government’s debt, would be greatly reduced.

Jaitley told newspersons after an RBI board meeting in the Capital that all issues were being discussed in a free and frank manner. “There is no question of any disconnect between the bank and the government and I have repeatedly clarified that,” the minister asserted. Last Friday evening, he had told a TV channel that “the question of taking away powers from the RBI did not arise”.

Rajan said on Sunday he favoured keeping the debt management entity independent of the government as well as the central bank to ensure fiscal discipline. “Public Debt Management Agency as a professional organisation, independent of the central bank and government, … is something that is desirable,” he observed, adding that such a structure “puts some discipline in the government debt process and also frees regulation of the need to create some sort of financial impression.”

The Union Budget for 2015-16 proposes to amend section 45U and W of the RBI Act relating to the central bank’s responsibilities of managing government debt.

The finance minister said “as far as proposals in the Finance Bill were concerned, they were before Parliament. Some of them we discussed earlier, we discussed them even now… I don’t wish to comment at this stage”.

Differing views on the composition of the monetary policy framework committee —which is to be set up following the agreement between the government and central bank on inflation-targeting — are also understood to have caused some friction between RBI and the government.

On Sunday, Rajan said discussions on the committee were on, adding that much of what was needed to be done was already out there. “There is an explicit framework. There is an explicit set of instructions as to what happens if we violate the framework etc,” the governor observed, adding that “over time, as the finance minister said, we will figure out the details of the committee”. Rajan said the number of members in the monetary policy committee (MPC) was yet to be determined.

The Urjit Patel committee has suggested the MPC comprise five members, all of whom would either be from the RBI or nominated by the RBI.

The RBI governor, deputy governor and ED in charge of monetary policy would be members and the other two would be chosen by the first two; apart from this, the RBI governor would have the casting vote in case one member is absent. The FSLRC (Financial Sector Legislative Reforms Commission) has proposed a seven-member committee with two RBI members and five external ones.

When asked whether banks would be pressured to pass on rate cuts to consumers, Jaitley said the government does not put pressure on banks but was hopeful they would do it in line with RBI policies. “We do not put pressure. We only expect and our expectations come true,” Jaitley said.

Although the RBI slashed interest rates by 0.5% between January-March, not many lenders have lowered the lending rates. Some banks are waiting for another rate cut by the RBI in its monetary policy meeting on April 7 before reducing rates.

Speaking on repo rate cuts, Rajan said the primary factor determining that will be the domestic price situation, though he added that it would  also depend partly on global factors including a rate hike by the US Federal Reserve. He said the US Fed might take a little longer to hike interest rates than anticipated.

In the context of unseasonal rains and hailstorms damaging  rabi (winter) crops in northern and central India, which could push up food inflation, Rajan said it was important to be watchful on the impact of these events on the food price situation.

Wholesale inflation had dipped to (-)2.06% in February, staying in the negative territory for the fourth consecutive month, while retail inflation jumped to 5.37% in February (from 5.19% in the previous month) on the back of higher food prices.

In his Budget address, in February, the finance minister had said that to begin the process of deepening the Indian bond market and taking it to the same level as the country’s “world class equity market”, the government intends to set up a PDMA that will bring both India’s external borrowings and domestic debt under one roof. A deep bond market is a vital factor in promoting investment in India, including in the infrastructure sector, the minister had said.

The Finance Bill envisages the PDMA  will help minimise the cost of raising and servicing public debt over the long term within an acceptable level of risk at all times, under the general superintendence of the Centre. It will issue and redeem short-term securities as required to meet the Centre’s cash requirements, besides being responsible for making payments to holders of government securities.

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