India govt in tiff with central bank over rates

RBI committee opts to maintain benchmark, declines finance ministry's call for meeting

The Reserve Bank of India (RBI) seal is pictured on a gate outside the RBI headquarters in Mumbai.
The Reserve Bank of India (RBI) seal is pictured on a gate outside the RBI headquarters in Mumbai. PHOTO: REUTERS

MUMBAI • Tensions boiled over between India's central bank and the government of Prime Minister Narendra Modi as Asia's third-largest economy faces its weakest growth in two years and record-low inflation.

Nine months after setting up an independent committee to oversee interest rates, the government is openly expressing frustration that the Reserve Bank of India (RBI) chose not to ease monetary policy on Wednesday. Economic conditions warranted a substantial monetary easing, said chief economic adviser Arvind Subramanian just hours after the central bank kept its benchmark repurchase rate unchanged as expected at 6.25 per cent.

"I think there is a plausible alternative macroeconomic assessment," Mr Subramanian said at a media conference in New Delhi. "Inflation forecast errors have been large and systematically one-sided in overstating inflation." The move to keep rates unchanged, amid a dissent within the monetary policy committee (MPC) for the first time, followed reports that the committee declined a meeting with the government.

"The meeting did not take place," RBI governor Urjit Patel told a media conference following the rates decision. "All the MPC members declined the request of the finance ministry for that meeting." Before the two-day RBI meeting, Finance Minister Arun Jaitley said in a statement that growth and investment needed to improve and any finance minister under these circumstances "would like a rate cut".

On Wednesday, he told Bloomberg TV that he had "respect" for the RBI's decision. "There is some level of divergence of views on interest rates between the government and the RBI," said Anand Rathi Securities chief economist Sujan Hajra, a former central banker, adding that this was common. "Clearly the RBI has downgraded its view on inflation and, with that, the stance will also have to soften."

The RBI did slash its inflation projections, a big departure from April, when Mr Patel said growing price pressures needed "close vigilance". "We believe this paves the way for a rate cut in the August policy meeting as the consumer price index is expected to remain subdued," said Standard Chartered Bank's head of South Asia economic research Anubhuti Sahay, referring to the cut in inflation projections.

The US$2 trillion (S$2.8 trillion) economy has been softer than the central bank forecast. Consumer price inflation rose just 2.99 per cent in April from a year earlier, the weakest on record. Core inflation - which strips out volatile food and fuel costs - rose 4.5 per cent in April from a year earlier, lower than the 4.8 per cent rise seen in March.


A version of this article appeared in the print edition of The Straits Times on June 09, 2017, with the headline 'India govt in tiff with central bank over rates'. Print Edition | Subscribe