Tension between RBI and the government is out in the open after recent monetary policy

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Indian government’s chief economic adviser Arvind Subramanian has criticised the inflation math calculated by the Reserve Bank of India (RBI), as well as its decision to keep the interest rates unchanged. On the other hand, RBI governor Urjit Patel has publicly declared how RBI is an independent body.

In short, the monetary policy has brought out in open the tension that has been brewing between the RBI and the government at a time when the economic growth is slow.

The tension could also be seen in the way Patel declared that all the officials of the monetary policy committee (MPC) had declined the finance ministry’s request to hold a meeting before the policy meet on June 6 and 7.

“The meeting did not take place; all the MPC members declined the request of the finance ministry for that meeting,” Patel said after announcing the second bi-monthly policy.

As per reports, the government had asked for a meeting to be organised with MPC members before the policy meet, which was widely criticised as its attempts to interfere and influence RBI’s decisions to change the interest rate or keep them as is.
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However, Finance minister Jaitley said that the government wanted the meeting to convey its point of view to MPC officials.

However, Subramanian criticised RBI’s inflation forecasting and management, presenting an alternative macro-economic view of benign inflation as against RBI’s insistence that inflation continues to pose risks.

Subramanian said that headline as well as core inflation has gone down, leaving the inflation outlook benign because of a rising currency, good monsoon and capping of global crude oil prices.

The pace of rate cuts has been a bone of contention between the RBI and the government for quite some time now, thanks to their different viewpoints about economic conditions and the strength of inflationary pressures.

Some economists are of the view that even after government’s attempts, RBI could not have cut the interest rates.
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“The central bank has always considered its independence as sacrosanct and it’s important to assert itself if the demands of the government are unwarranted,” said an economist requesting anonymity. “While one can debate over how big the inflation issue is presently, a rate cut from the RBI on the basis of transient data could impact the credibility of the regulator.”

Ever since he took charge, Subramanian has been saying that the country needs lower rates. His views were first argued upon by former RBI governor Raghuram Rajan, and now by Patel.


(Image source DeshGujarat)
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