MUMBAI: Mint Road observers were taken aback by the sudden calls from top two Union ministers to cut the interest rates, days ahead of the December 6 policy meeting and within a month of the governor Shaktikanta Das’ six-year term ending.
Are we going back to the days of bitter public spats that government and the Reserve Bank of India (RBI) had when Subbarao was at the helm which got lingered into the terms of Raghuram Rajan and Urjit Patel, though not on rates per se but on larger policy issues?
What has suddenly changed the honeymoon-days-like cordial relationship between the RBI and government in the past six years? Das completes his near record six-year term on December 12—the longest tenure since Benegal Rama Rau’s, who helmed the central bank for 7.5 years from 1949-57--and all indications signal that he’s going to keep the job for a year or two at least.
First it was the chief economic advisor V Anantha Nageswaran who made a wildcard demand in the last economic survey—skin food items off the retail inflation basket-food items constitute as much as 45.9% of the weighting in retail inflation basket and their prices cannot be controlled by monetary policy as they are supply-driven. The issue got a silent response from the RBI at the next policy presser: RBI believes that food inflation is central to its prices control objectives.
On November 14, just ahead of Das’ speech at an industry event, commerce minister Piyush Goyal dropped the rate bomb—first time in six years: “I certainly believe the central bank should cut interest rates. Growth needs further impetus. It’s absolutely a flawed theory to consider food inflation while deciding interest rates.” Since Das was the next speaker, when sought comments, he quipped: “the next monetary policy is coming up in the first week of December. I would like to reserve my comments for that.”
Again on November 18, in Mumbai, finance minister Nirmala Sitharaman dropped the next rate bomb but indirectly, saying “the cost of borrowing is really very stressful. At a time when we want industries to ramp up and build capacities, bank interest rates will have to be far more affordable.” Do these two calls signal the not-so-publicly-acknowledged-fear of the government that the economic engine is stalling? In Q1, GDP printed at a six-quarter low at 6.7% (vs 8.2%), and all projections show Q2 growth will fall more to a multi-quarter low of 6.5-6.7% (vs 7.8%). Also all numbers indicate urban demand is waning while rural is just picking up but not good enough to offset the slowing in the former.
Or does it indicate the government is seriously concerned about the plight of the public amidst rising inflation--as was made clear by the FM last Monday when responding to an X user’s call for relief to the middle class from rising inflation, she said she understands the concern and that the government listens to citizens voices and thanked him for his understanding and inputs.
An RBI observer, who doesn’t want to be named, said, “government calls for rate cuts mostly stem from the falling macro indicators. Of course, the government doesn’t want to admit that all is not well on the economic front.
After all, if at all the rates are lowered say from February, its impact will take at least three to six quarters to manifest in macro numbers. “So, probably the government is trying to ensure that if at all growth falls short of the forecast this fiscal, which is more likely, it can take comfort that next fiscal can offset the losses of this fiscal,” he told TNIE.
Another economist wondered how Union ministers can make wild demands when they know very well that the RBI is bound by the inflation targeting legislation that mandates it to bring it down to 2-4% with 2% leeway either way.
What’s more surprising is that both the calls came in after inflation shot up to a 14-month high of 6.21% in October, he quipped.
“While one can ignore the call from the commerce minister, as he may have got some representations from importers given the falling rupee and the higher interest rates, the finance minister, under whose direct watch the RBI functions, making such a demand is quite strange,” he added.
The FM’s statement that since food prices are dictated by global supply issues, “we need to have more conversation on inflation-interest rate dynamics” points to another thinking in the government—on following its chief economic advisors call for skinning off food items form retail inflation and thus nudge to RBI to re-examine the interest rate-food inflation connection and possibly consider cutting rates sooner rather than later.
What is more important is that the pressure to cut rates comes at a vulnerable time for RBI. The three new MPC (monetary policy committee) members are newbies and may not be savvy enough to handle the diktat from the government. More importantly, deputy governor Michael Patra, the only MPC member since its inception, is retiring by mid-January. His absence will make it tougher for the MPC to fend off government pressures.