BackNew RBI governor Urjit Patel facing old interest rate cut battles
Ahead of the 4 October monetary policy review, talks about a rate cut is gaining ground in ministry circles
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The more things change, the more they remain the same.
The central bank governor is new and the monetary policy framework is new with a panel setting rates, but the pressure from New Delhi on rate decisions is all too familiar.
Ahead of the 4 October monetary policy review, talks about a rate cut is gaining ground in ministry circles.
On Thursday, it was the turn of chief economic advisor Arvind Subramanian. In an interview to the Business Standard, Subramanian said that there was space for monetary easing.
“I felt that the last few pronouncements of the Reserve Bank of India (RBI) were a little backward on inflation concerns. I have been saying for about two to three months that inflation has turned. I thought inflation would reduce and that has how it is panning out. There is space for monetary easing," he said.
Senior finance ministry officials have been telling reporters that a rate cut in the 4 October policy is a given.
Government statements on rate decisions have a long history in India. Previous finance ministers such as P. Chidambaram have often freely expressed their views on monetary policy and interest rates leading to charges that the government was impinging on the central bank’s independence.
Also Read: Search on for new RBI deputy governor
A 2014 study by N. Nergiz Dincer of TED University, Ankara, and Barry Eichengreen of the University of California, Berkeley, ranked the RBI as the world’s least independent central bank. The rankings pertained to 2010.
Even when moving to the new framework of rate setting, there were concerns that the government was unduly trying to gain influence over the RBI by not agreeing to the Urjit Patel Committee’s recommendation of a five-member team, whose external panellists would be chosen by the central bank.
With the appointment of three economists, the government has been able to shake free from that charge, for now.
Of course, government officials have taken exception to charges that they interfere in the monetary policy.
“When we speak about monetary policy, it is interference in the independence of the central bank, when he (former RBI governor Raghuram Rajan) speaks about fiscal policy, it’s fine," a senior finance ministry official told Mint, on the condition of anonymity.
To be sure, it is not only the government but even economists who see a chance for a rate cut next week. Retail inflation decelerated sharply to 5.05% in August, while industrial production contracted by 2.4% in July, the lowest in eight months. The US Federal Reserve leaving its interest rates unchanged (even though signalling it could hike rates by the end of this year) increases the odds for a rate cut.
The consensus is that given better-than-expected reduction in food inflation, consumer price inflation would not breach the 5% target the RBI has set for March 2017.
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