RBI governor Raghuram Rajan's blunt comments on interest rates and growth have upset government officials. Officials said that there was a feeling in North Block that the governor could have toned down some of his comments. The latest sign of unease between the finance ministry and the RBI comes at a time when steps had been taken by the government to bridge the gap between the two key managers of the economy.
There is a view emerging that Rajan's comments on the monsoon situation and government response could have been made with a more positive tone, especially when market commentators and participants are seen to have "over-reacted" to the weather office's bleak monsoon forecast.
Similarly, he made some frank observations on the policy towards the minimum support price for farm products, for long a political issue and a point of stress even among ministries at the Centre. When asked, finance minister Arun Jaitley declined to comment on the governor's statement.
Officials, however, said some of Rajan's comments were seen to be suggesting what path the government should take for overall economic management, something that the RBI has frowned upon whenever officials in Delhi have suggested that the central bank should cut interest rates to boost growth. For the past few years, the relationship between the RBI and the finance ministry has been tenuous, starting with the time when Pranab Mukherjee set up the Financial Sector Development Council to be headed by the finance minister.
While interest rate has always been a bone of contention, the government believes that the RBI is always trying to resist structural change in a bid to protect its turf. The latest instance is setting up of an independent public debt management agency, a proposal moved by Jaitley in the Budget.
Amid a volley of protest from Rajan and his team, the government postponed the legislative change, pending further discussions with the central bank. The RBI watchers see this as two institutions smoking a peace pipe. But, Rajan's comments appear to have triggered speculation of a rocky ride ahead.
"The RBI is not a cheer leader. Our job is to give people confidence in the value of the rupee, in the prospects of inflation, and having established that confidence, create a longer-term framework for good decisions to be made," Rajan had said at a post-policy conference call with the media.
Rajan had also raised doubts about the strength of the economic recovery. "So those are the reasons why we do feel that the economy is still below potential, output gap is still somewhat negative, and that as these things reverse, of course, then matters will change. Even with the 7.5% growth rate, there is some discussion of how much that includes special factors in the last quarter including excise, taxes, and subsidies. When you subtract that, the growth in the last quarter does not look as strong as before. So you could point to those numbers also suggesting growth is weaker than at least the headline numbers suggest," the RBI governor had said.
