Differences emerged on Sunday between the Reserve Bank and the Finance Ministry over the structure of a committee that will set interest rates and take monetary policy decisions - instead of the central bank’s Governor - even as the two sides downplayed reports of friction over the biggest regulatory shakeup in its 80-year-old history.
After addressing the Reserve Bank’s board of directors, Union Finance Minister Arun Jaitley told reporters that the central bank and the Ministry were in continuous discussions, including on proposed amendments to the RBI Act he announced in his budget speech. “There is no disconnect,” Mr. Jaitley said.
While the RBI Act empowers the Governor ‘singularly’ and ‘solely’ to set rates, the Ministry is making a case for the task to be given to an eight-member Monetary Policy Committee, including a government nominee but with no voting rights. The Reserve Bank, however, favours a five-member panel where the majority would determine policy decisions and the Governor would act as tiebreaker only if a member was absent. The Reserve Bank’s proposed five-member committee would include two outside experts picked by it but no government nominee.
“Until the proposed amendments are ready and passed by Parliament, the Governor will continue to set rates as laid out in the RBI Act,” an RBI source said.
In an agreement the Reserve Bank signed in February with the government, it committed to bring inflation below 6 per cent by January 2016. The consumer inflation target has been set at 4 per cent, with a band of plus or minus 2 percentage points, for the financial year 2016-17.
“The operating framework available to the Reserve Bank under the agreement is sufficient legal basis for it to conduct monetary policy and the agreement can be renewed if by the date of its expiry the RBI Act amendment is not done in Parliament,” the RBI source explained.
Governor Raghuram Rajan told reporters at the joint press conference: “Overtime, as the Finance Minister said, we will figure out the details of the committee.”
Responding to a question on the budget proposal to take away the Reserve Bank’s government debt management role, he said that as a concept it was ‘a very worthwhile’.
He, however, alluded to the need for making the new proposed Public Debt Management Agency (PDMA) independent of government too and not just the central bank. “The PDMA as a professional organisation, independent of the central bank and government, that is something that is desirable,” he said.
On demands for further monetary easing after two quarter-percentage-point cuts to the central bank’s benchmark rate so far this year — he said that the primary factor deciding interest rates would be inflation.
The Reserve Bank would watch the impact of unseasonal rains and hailstorm on the price situation, he said.
“As far as rains go, there is no direct one-to-one correlation between rains and prices… 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.”
He also said that following the latest statement by the U.S. Federal Reserve his expectation was that it would not hike U.S. interest rates soon. He also brushed aside concerns that the anticipated hike would limit his freedom to act, saying that Indian monetary policy would be driven primarily by domestic developments.
Mr. Jaitley, responding to a question, clarified that the actual expenditure during the year beginning April 1 on health, education and other social sectors would rise. “Only the mode of expenditure has changed because of the recommendation of the 14th Finance Commission… 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,” he said.
With most PSU banks yet to pass on the benefit of the Reserve Bank’s monetary policy easing to loan seekers, Mr. Jaitley said he expects the lenders to cut interest rates soon. “We do not put pressure on them …We only expect and our expectations come true."
