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On rate hikes, first signs that RBI and Govt may not be on the same page

With tacky inflationary pressures on retailers suggesting that the Reserve Bank of India (RBI) is likely to continue raising interest rates, there are early but discernible signs of a disagreement between the government and the central bank over the latter’s monetary action. to control inflation versus the need for the former to rekindle growth.

Amid sluggish employment trends, subdued private investment and the challenge of sustaining the nascent consumption recovery, there are multiple signs that North Block is leaning towards a favorable pace of rate hikes by the RBI rather than the aggressive stance of developed country central banks. . to land.

The government believes that in the wake of the ongoing conflict between Russia and Ukraine, inflation is mainly driven by global factors. “Until recently, inflation was a concern, largely due to external factors that are now cooling,” said a senior government official.

Seasonal factors affect food prices, but many of these items are well stocked, the official added. It is also increasingly recognized that employment growth is not keeping pace. “While growth has picked up after the pandemic, employment elasticity is lower and that is a concern,” said another official. With many agencies lowering their growth forecasts for India, the government is concerned that a sharp rate hike could dampen growth prospects.

The RBI is stuck. It is only a month short of exceeding its inflation target for three consecutive quarters, after which it will have to formally explain the reasons for the breach of its inflation target to the government. The RBI plans to hold a special meeting of the Monetary Policy Committee after the next inflationary pressure comes out on Oct. 12 to discuss the report it will have to submit to the government.

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Recent retail inflation pressures for August came in at 7 percent, marking the eighth month above the upper bound of the RBI target of 4 +/- 2 percent, and staying above 4 percent for nearly three years (35 months). From the central bank’s perspective, easing is not a viable strategy at this point, according to an official familiar with multiple discussions on the subject.

Last month, the RBI announced a third hike in the repo rate to 5.4%, a 140bp increase since May.

On Friday, as part of its State of the Economy bulletin, the RBI favored a “frontloading of monetary policy measures,” such as rate hikes, to contain inflationary pressures without sacrificing the prospects for “medium-term growth.” However, the RBI stressed that the opinions expressed in the article were those of the authors, which also included Deputy Governor Michael D. Patra.

On September 8, at an ICRIER conference, Union Finance Minister Nirmala Sitharaman described the challenge with a disclaimer. “The Reserve Bank will have to synchronize somewhat, perhaps not as much as the advanced central banks. I am not prescribing anything to the Reserve Bank, I am not giving forward direction to the central bank. But the truth is – India’s solution to dealing with the economy, part of which includes dealing with inflation, has been an exercise where fiscal policy has been working in tandem with monetary policy. It cannot be left to monetary policy alone, which has proved totally ineffective in many countries. And these are countries whose structures form the basis of the monetary policy theory that interest rates are the powerful tool to control inflation,” she said.

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The day before, during a speech at the India Ideas Summit hosted by the US-India Business Council (USIBC), the FM had said that inflation has been brought down to manageable levels and is no longer a “red letter” priority. “Red letters would, of course, be jobs, an equitable distribution of wealth and ensure that India stays on the path of growth. In that sense, inflation is not a red letter. I hope it will not surprise many of you. We’ve shown in recent months that we’ve managed to bring it down to a manageable level,” she says.

Earlier this week, in a discussion of the book’s chief secretary PK Mishra with finance committee chairman NK Singh, spoke along the same lines about the need to structure policy beyond the “one-dimensional” focus on inflation.

In its latest monthly economic statement released on Saturday, the Treasury Department said it expects consumption to pick up and a sharp rebound in private consumption, supported by rising consumer confidence and rising employment, will “slow growth in the coming months.” months will support”. A high interest rate cycle typically affects consumer and investment sentiment.


Govt vs RBI, a history

Questions sent by The Indian Express to the Treasury Department and the RBI went unanswered.

The difference in views between North Block and Mint Street on the issue of rate hikes is not new. In April 2015, even after two rate cuts that year by the RBI, then Treasury Secretary Arun Jaitley had said he wanted rates “a lot lower”, noting that there were no differences between the government and the RBI. .

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Later in August 2015, with more pressure to cut interest rates amid slowing growth, RBI Governor Raghuram Rajan said rate cuts should only be made after continued low inflation, not as “goodies” handed out after public pleas. .

Former RBI Governor Duvvuri Subbarao, who was in charge during the global financial crisis and served a five-year term from 2008-2013, signaled this lingering tension in his recent book. “Both (Finance Ministers) (P) Chidambaram and Pranab Mukherjee were annoyed by the Reserve Bank’s tight interest rate policy, as the high interest rates held back investment and hurt growth,” Subbarao wrote in his book.

In October 2012, then Finance Minister P Chidambaram had indicated that the RBI was not aligned with the Ministry of Finance. “If (the) government has to walk alone to meet the challenge of growth, then we will do it alone,” he said.

In a recent research paper, Nomura said most Asian central banks are expected to maintain a gradual pace of gains as the inflation cycle in Asia is favorable versus the US and Europe and there is limited evidence of a wage price spiral.



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