Is FM politicking with RBI?

Jaitley pushing for amending the RBI Act to constitute a monetary policy committee

Finance Minister Arun Jaitley has stoutly refused the reports that the government has serious differences with the Reserve Bank of India (RBI) and said ‘both always had free and frank discussions, but not ‘disconnect’. Even RBI Governor Raghuram Rajan has played differences down. He, however, commented on Public Debt Management Agency (PDMA) that though it is desirable (constitution of PDMA), he wanted that it should be a professional entity independent of the RBI and the government.

The customary 17-member RBI Central Board meeting, which the Finance Minister addresses after the presentation of the Union Budget, has turned out to be the place for showing off powers. There were always hitches between the banking regulator and the government, especially over the rate cut. These differences came to fore during former RBI Governor D Subbarao’s period, and are still continuing.

Perhaps, this may be the reason the government likes to snip the powers of RBI. Accordingly, in the Budget proposals, the government proposed to bring amendments to the Finance Bill, thus taking away RBI’s primary powers of regulating the monetary policy while announcing that an eight member committee would be established for the purpose. It also likes to take away the regulatory authority off the apex bank to monitor the government securities and likes to pass it on to the Sebi. Further, the recent contentious issue between the finance ministry and the apex bank is over the structure of the proposed committee that will set the interest rates and monetary policy decisions.

The RBI opines the committee will become pro-government if it has more members from outside the central bank, but the government insists induction of more outside talent in the committee. Through amendment to the Finance Bill, the government wants to take away RBI powers to regulate interbank repo and reverse repo rates (amendment to Section 45-U) and shift the regulation of G-Secs and money market instruments to the Sebi (amendment to Section 45W).

Though, not opposing shifting of the authority, Rajan insists that the government should have lesser control on the monetary policy. Asserting the bank’s authority, he told the media that inflation would continue to be the primary factor for future rate cuts by the RBI. “While the external environment is a constraint, a lot of what we need to do has to do with the internal environment,” he said.

Till the Act gets amended, RBI Governor will singularly and solely set the rates. Now, the Finance Ministry likes to have an eight-member monetary policy committee where the government will have its nominee, without voting right. On the other hand, RBI favours a five-member panel including two outside experts, but not government nominee, where the majority would take policy decision and the government will act as tie-breaker. Time will only reveal who will have his way – Jaitley or Rajan?

By:KVVV Charya