RBI-government rift

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Bikky Khosla | 13 Jun, 2017
The RBI last week came out with another monetary policy review; the key interest rates were kept unchanged; the Indian industry argued that the central bank overlooked the pressure being borne by it -- there is nothing new in this development. In fact, a number of economists had already predicted such a move. But there are some surprises this time as well. For the first time since the new Governor has taken office, the differences between the central bank and government have spilled into the open, reigniting the growth-versus-inflation debate.

Earlier in the week, the Finance Minister had made a strong case for a lower interest rate regime citing low inflation as well as the need to revive investments and growth, but the RBI this time not only resisted such insistent calls, but also asserted its autonomy by revealing -- in an unusual press conference after the policy announcement -- that the members of its monetary policy committee had not accepted an invitation to meet Finance Ministry officials ahead of the monetary policy review. This was followed by the chief economic adviser's counter argument that the current economic situation warranted a "substantial monetary policy easing".

While the RBI's refusal to bow to the whims of the Centre has been hailed by many, views on its rate hold decision differ greatly, however. Sticky core inflation, rise of food grain stocks, petrol and diesel prices, surging rural wage growth, strong consumption demand and 7th central pay commission's award were viewed by the apex bank as some of the major concerns, but the Indian industry -- a larger part of which has been reeling under heavy debts and high interest costs -- feels that the RBI has chosen to remain overcautious, underestimating growth concerns and industry worries. As to who is right, that remains a thorny question.

Meanwhile, while the RBI policy voices concern also about large farm loan waivers, which may lead to fiscal slippages and rise in inflation, interestingly a latest report argues that the recent farmers' agitation across various states may have its roots in the central bank's aggressive stance to contain retail inflation. In order to keep the CPI under the RBI's 4% target, the rise in prices of food items -- which have about 46% weight in retail inflation -- should be in 5-6% range, which has happened at ground level, the report says, pointing to the danger of targeting food inflation consistently at very low levels without adequate agri reforms. This concern deserves attention of both the RBI and the Centre.

I invite your opinions.