CEA Arvind Subramanian flays central bank’s status quo on rates as Urjit Patel asserts RBI autonomy
Differing views in terms of monetary policy between Reserve Bank of India Governor Urjit Patel Chief Economic Advisor of the Finance ministry Arvind Subramanian played out in full public view barely hours after the central bank announced the Monetary Policy Committee’s decision to keep key interest rates unchanged. While that was widely expected, what came as a surprise for many was RBI Governor’s public comment many saw as an attempt to assert RBI's autonomy and independence.
Patel told reporters that the six-member MPC had unanimously decided to decline a request by the Finance ministry for a meeting with its members a week ahead of its review. “The meeting did not take place; all the MPC members declined the request of the finance ministry for that meeting,” Patel told reporters in a press conference after announcing his second bi-monthly policy.
Media reports last week said that the government had called for a meeting with members of the monetary policy committee just ahead of the policy meet. The move was widely criticised as government attempts to meddle and influence RBI’s interest rate decisions. The government, however, had defended its decision saying it was well within its rights to convey its point of view.
On Wednesday, the Monetary Policy Committee headed by Reserve Bank Governor Urjit Patel, decided to keep the key policy rates unchanged. While the repo rate will remain at current 6.25 per cent, reverse repo rate was also maintained at 6.00 per cent. The RBI, however, decided to cut the statutory liquidity ratio by 50 basis points.
The RBI has projected inflation in 2-3.5 per cent range for first half of 2017-18 and 3.5-4.5 per cent for second half. The Goods and Services Tax (GST), which the government plans to implement from July 1, is not expected to have any material impact on overall inflation, the central bank said.
It has, however, cut the growth projection for current fiscal to 7.3 per cent, from 7.4 per cent.
Patel’s unprecedented public assertion of the RBI’s autonomy was followed with a scathing critique of the RBI’s inflation forecasting and management by CEA Arvind Subramanian. He presented an alternative macro-economic view of benign inflation in contrast to the RBI’s insistence on continuing upside risks to inflation. According to Subramanian, headline as well as core inflation has declined sharply and the inflation outlook has been rendered benign by a rising currency, good monsoon and capping of oil price increases by structural shifts.
He blamed the RBI’s inflation forecasting methodology and said the errors have been large and systematically one-sided in overstating inflation.
“In recent times, seldom have economic conditions and the outlook warranted substantial monetary policy easing,” Subramanian said, warning that real policy rates are becoming tighter amid low inflation and slowing growth. Notably, Subramanian has also been at odds with former RBI chief Raghuram Rajan over lower interest rates.
The RBI and the government have been at loggerheads for quite some time about the pace of rate cuts. Their assessment about prevalent economic conditions and the strength of inflationary pressures have also differed sharply. This battle is an old one and is not confined to this administration alone. D Subbarao observed in his book how he earned the wrath of then FM P Chidambaram for not heeding his call to cut rates in 2012.
Subramanian has been arguing for lower rates ever since he took over as CEA late in 2014. His views and those of others in the government were challenged by Rajan, who took a measured approach to rate cuts in his three-year tenure. Rajan cut rates by 175 bps but that did little to spur private sector capital investment.