The most noticeable aspect of the recent monetary policy review by the Reserve Bank of India is not something in the statement but in what happened before and after the announcement.

The Finance Minister’s keenness to have a lower interest rate regime was well known even to those who have no clues as to what a monetary policy or its review means.

In the run up to the policy, he had, on more than one occasion, dropped hints that the RBI should cut the policy rates. On Monday last, the day before the policy announcement, the Finance Minister, while presenting a fiscal road map — basically a plan to get a handle over the ballooning fiscal deficit within a five-year timeframe, hoped that the RBI would cut policy rates to reinforce the good work done by his government (in trying to bring down the fiscal deficit in a time-bound manner).

Earlier, there were other announcements, too — easing of foreign direct investment norms in retail, civil aviation, insurance and pension funds. The hike in diesel prices, and the capping of LPG cylinders are part of a strategy to rein in the fiscal deficit. With all these, the government is seen refurbishing its fiscal position at last and, thereby, blunt the criticism that it has left the monetary policy all to itself in its battle against inflation. There are no two opinions that these announcements have boosted stock market sentiment. There was nothing better that the government would have liked than a positive interest rate signal from the RBI to reinforce the sentiment. But then the RBI was not convinced.

The RBI lowered the Cash Reserve Ratio (CRR) by 25 basis points but did not touch the repo rate. Mr. Chidambaram’s sense of disappointment has been palpable. His headline grabbing statement “the government ‘will walk alone’ to support the growth process’’ said it all.

It was also a public proclamation of the differences between the government and the central bank. Obviously, whether to have a rate cut or not will not be the only area of divergence between the two (indeed patching up inter-ministerial differences is part and parcel of public policy and administration). But owing to a number of factors, the spat over interest rate has been spilling over into the public domain more frequently than any other issue.

An important reason arises from the fact that even the ordinary person today realises that he has a stake in monetary policy formulation. Even now, repo rate or CRR cuts may not be understood. But the broad thrust of the policy on interest rates is something which everyone relates to it. Arising out of that it is easy to see why the relative claims of growth and price stability — two often conflicting objectives are dealt with in the monetary policy statement.

The government’s posturing — as an important proponent of growth — is not without basis. But for it to think that the RBI should have acted against its conviction and gone in for a rate cut is not correct. In focus here are a few key issues. First, as explicitly stated by the RBI in the policy review, inflation remains a key concern even as growth has moderated.

So, a relaxation of its tight money stance is not called for at this juncture. This aspect of the policy statement is well known.

Also, the RBI has been resorting to CRR reductions to pump in liquidity and, thereby, augmenting credit flow to the needy sectors. So, in a way, growth concerns have been taken into account.

Second, by ignoring the pressures to cut policy rates, the autonomy of the central bank and the independence of the monetary policy are upheld. Too much, however, need not be made of this point. It would be useful to realise that government pressures on the RBI will always be there, though, perhaps, it will be felt in more subtle ways. Three, the concerns of depositors have been recognised. As pointed out by the Governor in his post-policy media conferences, bank depositors across the country feel aggrieved over the interest rate policies, which invariably favour the borrowers rather than the depositors. With inflation levels being what they are, almost all bank depositors are getting negative returns.

A repo rate cut at this juncture would further aggravate the divide between depositors and bank borrowers. That will be particularly bad news for pensioners and other vulnerable sections, who are solely dependent on interest income from bank deposits.

Four, the argument that the RBI should have, as a measure of reciprocity, cut its policy rate in tandem with various sentiment — boosting government measures is not particularly appealing, even if that is what many people think. For a start, the time-horizon for the various government measures is well into the future. FDI liberalisation in retail and other sectors is highly unlikely to result in immediate cash flows.

Likewise, the fiscal road map is stretched over five years. For the government to stick to it, it has to take several tough decisions, which may be particularly unpalatable in a political sense. Along the way, the government has made some major assumptions of GDP growth, expenditure compression and receipts from tax buoyancy and capital receipts. For this year, the government has bet heavily on ‘one-off’ measures such as 2G auctions (Rs.40,000 crore) and public sector disinvestment.(Rs.30,000 crore). The spectrum auctions have not elicited the response the government hoped for. On the divestment front, the one company — RINL — whose float seemed imminent, had the issue deferred owing to differences in valuations.

Looking at the monetary policy and beyond, it is good to realise that growth is everyone’s concern, not just that of the government. Acting on its own priorities, the RBI has conveyed that message quite effectively.