Given the context, the meeting between RBI Governor Raghuram Rajan and the new Finance Minister, Arun Jaitley, was expected to be significant. In the event, the meeting, which was among the first between a senior government officer and a senior Minister of the new government, has been noteworthy for several reasons. Most importantly, Mr. Jaitley appears to be on the same wavelength as the RBI, acknowledging the challenges the government faces in restoring the pace of growth, contain inflation and concentrate on fiscal consolidation, all important policy objectives whose pursuit involves “a tough balancing act”. Those words will resonate well with the RBI, which has scheduled the second bi-monthly monetary policy review of the current year (2014-15) for June 3. That will be the first official major economic policy statement after the formation of the government. The BJP-led NDA government has fought and won the elections largely on an economic agenda, the promise to revive growth, improve governance and curb rising prices. The last has been a particularly decisive factor during the recent State elections as well and will present a major challenge to the new government. Too often in the recent past, the Finance Minister and the RBI have differed on the approaches to maintaining price stability and reviving growth. These might be early days yet, but the messages from the first meeting between the Minister and the Governor are positive for the conduct of macroeconomic policies without public bickering or contrary political pressure over immediate policy goals.
The monetary approach to curbing inflation is through interest rate hikes but that runs counter to reviving economic growth, at least over the near term. The government’s preference for a softer interest rate regime has not always found favour with the RBI which had doggedly pursued its own course to bring down consumer inflation to 8 per cent by January 2015 and to 6 per cent a year later. The traditional monetary policy dilemma of growth versus stability is once again in focus. Consumer price inflation is above the RBI’s comfort zone. However, industrial growth has been weak to the point of stagnation. While this suggests an interest rate cut, the RBI will most likely again urge the government to undertake supply side measures to cool inflation and outline a credible programme of fiscal consolidation. After a lull, the overall economic outlook looks better. The CAD has been reined in. The economy seems poised to break out of the sub-5 per cent growth trajectory. Monetary and fiscal policies complementing each other will be vital to spur growth and maintain price stability.