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Mumbai: Reserve Bank of India governor Urjit Patel on Wednesday said that all three external members of the Monetary Policy Committee (MPC) had declined a request for a meeting with finance ministry officials ahead of the policy meet.

The meeting was scheduled last week ahead of the credit policy meeting that began on Tuesday. It was to be attended by chief economic adviser Arvind Subramanian, principal economic adviser Sanjeev Sanyal, and economic affairs secretary Shaktikanta Das.

The request for the meeting had sparked a debate on whether the government was influencing the central bank into cutting interest rates, or shedding its hawkish stance following the fall in retail inflation to a record low and slowing of economic growth due to demonetisation.

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In an interview to Business Standard on 25 May, Subramanian had said such meetings would be an attempt to “give structure to government inputs to the MPC".

The RBI Act gives the government the power to issue directions to the central bank in public interest, after consultation with the governor.

Arvind Virmani, who was part of the erstwhile Technical Advisory Committee to the RBI on monetary policy, said the RBI and the government should jointly make a rule that the government will not meet MPC members 2-3 weeks preceding the meeting and a day after the monetary policy announcement. “They can meet to exchange information, knowledge and views as frequently as they wish, during the rest of the period. This will help avoid speculation and help the credibility of both the government and the MPC," he said in an email to Mint.

The six-member rate-setting panel is headed by the RBI governor. The three government-appointed members are Chetan Ghate, a professor at the Indian Statistical Institute; Pami Dua, director of Delhi School of Economics; and Ravindra Dholakia, professor at the Indian Institute of Management, Ahmedabad.

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Under the MPC framework, the RBI is committed to targeting inflation at 4%, with a band of 2% on either side. If the central bank fails to meet the target, it will have to explain the reasons for its failure to do so, as well as give a time frame within which it will achieve it.

“The MPC has a mandate to keep inflation under check and in future, if there is a seeming difference between the government and the RBI on rates, such meets may then send a wrong signal to the market," said the treasury head of a foreign bank on condition of anonymity.

On Wednesday, in response to the RBI’s announcement, Subramanian said that inflation forecast errors have been large and systemically one-sided in overstating inflation. He added that real policy rates are tight and rising amid low inflation and slowing growth.

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The RBI kept the repo rate unchanged, but softened its hawkish stance owing to the fall in retail inflation to a record low and lower-than-expected economic growth.

Retail inflation as measured by the Consumer Price Index dropped to a new record low of 2.99% in April from a nearly five-month high of 3.89% in March on a lower base effect and lower food prices.

“In recent times, seldom have economic conditions and the outlook warranted substantial monetary policy easing," Subramanian said.

Gireesh Chandra Prasad in Delhi contributed to this story.

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