Rajan-virus for PC-Business Standard 03.02.14
After a brief honeymoon, the tension between Mint Road and North Block is growing once again
Shyamal Majumdar
When Raghuram Rajan took over as the Reserve Bank of India Governor in September last year, many in the finance ministry and the central bank had hoped to reset the relationship that had taken a few hard knocks during D Subbarao’s tenure. One of the decisions taken at the highest level of the government was that the ministry would not make any public statement post the monetary policy announcements by the RBI. And expectations ran high that Rajan will be able to bridge the growing chasm between the two.
The honeymoon, however, seems to be finally over.
Consider the government’s sharp reaction to the Urjit Patel committee report – something that is obviously close to Rajan’s heart. The core recommendation of the panel was ultimately to bring down CPI inflation to 4%, plus or minus 2%. While that would make policy making more predictable and less prone to government pressure, it also means rates would stay high for longer as CPI inflation now stands at nearly 10% -- the highest among major economies.
A day after the report, Economic Affairs Secretary Arvind Mayaram said making CPI the nominal anchor for monetary policy will be premature. Chidambaram, who has been the fiercest lobbyist for lower interest rates over the past couple of years, made the ministry’s displeasure more explicit by terming the targets set in the Patel report “ambitious” and by offering a reminder that the central bank, too, had a duty to push growth.
But Chidambaram should have known Rajan better. For, the former Eric J Gleacher Distinguished Service Professor of Finance at the University Of Chicago Booth School Of Business has always been a vocal critic of easy money policies. His wariness of inflation is well-documented, as is his cynicism about central bank efforts to juice growth with loose monetary policy.
So, just five days later, Rajan responded – and how. Speaking to media, Rajan didn’t name anybody but said the notion that the central bank is standing in the way of economic growth is "nonsense". Also, increasing the repo rate in the latest monetary policy – his third in four quarters -- was just one minor part of his response. Rajan went on to say that there was no trade-off between growth and inflation and he is bent on moving towards a "glide path" towards lowering the CPI according to targets laid out in the Patel committee report.
Without explicitly saying so, the RBI has effectively begun to target inflation based on consumer prices, which is a dramatic shift in approach for a central bank that has so far struggled to manage the balance between growth and inflation.
The signal was clear: the new Governor will brook no opposition to his plan for adopting retail inflation as the main price gauge. Consider his statement: “What we can do (on the Patel committee report) and we want to do, we’ll take up.” That is what is hurting the finance ministry the most. For, if the report is adopted by the Governor, one can kiss goodbye to any ideas about a drop in interest rates this year at least.
Rajan didn’t stop at that and also said, “If the government policies in aggregate prove to be expansionary, we will have to adjust policies ourselves to meet the overall disinflationary process.” No RBI Governor can speak his mind more clearly than this.
What takes the cake, however, is the way the Governor criticised the Union Cabinet’s move to raise the cap on subsidised liquefied petroleum gas (LPG) cylinders from nine to 12 per connection in a year. Minutes after the Rahul Gandhi-inspired move was made public, Rajan told a TV channel that it was a “misdirected subsidy”. Though the government hasn’t responded to the latest barb as yet, the distance between North Block and Mint Road has certainly become longer.
Rajan was all along well aware of this problem. The day he took over, he had recited a stanza from Rudyard Kipling’s famous poem, “If”. The Governor said he agrees with the author that “You can keep your head when all about you are losing theirs and blaming it on you”.
Famous first words – those.
The honeymoon, however, seems to be finally over.
Consider the government’s sharp reaction to the Urjit Patel committee report – something that is obviously close to Rajan’s heart. The core recommendation of the panel was ultimately to bring down CPI inflation to 4%, plus or minus 2%. While that would make policy making more predictable and less prone to government pressure, it also means rates would stay high for longer as CPI inflation now stands at nearly 10% -- the highest among major economies.
A day after the report, Economic Affairs Secretary Arvind Mayaram said making CPI the nominal anchor for monetary policy will be premature. Chidambaram, who has been the fiercest lobbyist for lower interest rates over the past couple of years, made the ministry’s displeasure more explicit by terming the targets set in the Patel report “ambitious” and by offering a reminder that the central bank, too, had a duty to push growth.
But Chidambaram should have known Rajan better. For, the former Eric J Gleacher Distinguished Service Professor of Finance at the University Of Chicago Booth School Of Business has always been a vocal critic of easy money policies. His wariness of inflation is well-documented, as is his cynicism about central bank efforts to juice growth with loose monetary policy.
So, just five days later, Rajan responded – and how. Speaking to media, Rajan didn’t name anybody but said the notion that the central bank is standing in the way of economic growth is "nonsense". Also, increasing the repo rate in the latest monetary policy – his third in four quarters -- was just one minor part of his response. Rajan went on to say that there was no trade-off between growth and inflation and he is bent on moving towards a "glide path" towards lowering the CPI according to targets laid out in the Patel committee report.
Without explicitly saying so, the RBI has effectively begun to target inflation based on consumer prices, which is a dramatic shift in approach for a central bank that has so far struggled to manage the balance between growth and inflation.
The signal was clear: the new Governor will brook no opposition to his plan for adopting retail inflation as the main price gauge. Consider his statement: “What we can do (on the Patel committee report) and we want to do, we’ll take up.” That is what is hurting the finance ministry the most. For, if the report is adopted by the Governor, one can kiss goodbye to any ideas about a drop in interest rates this year at least.
Rajan didn’t stop at that and also said, “If the government policies in aggregate prove to be expansionary, we will have to adjust policies ourselves to meet the overall disinflationary process.” No RBI Governor can speak his mind more clearly than this.
What takes the cake, however, is the way the Governor criticised the Union Cabinet’s move to raise the cap on subsidised liquefied petroleum gas (LPG) cylinders from nine to 12 per connection in a year. Minutes after the Rahul Gandhi-inspired move was made public, Rajan told a TV channel that it was a “misdirected subsidy”. Though the government hasn’t responded to the latest barb as yet, the distance between North Block and Mint Road has certainly become longer.
Rajan was all along well aware of this problem. The day he took over, he had recited a stanza from Rudyard Kipling’s famous poem, “If”. The Governor said he agrees with the author that “You can keep your head when all about you are losing theirs and blaming it on you”.
Famous first words – those.
http://www.business-standard.com/article/finance/rajan-virus-for-pc-114020300079_1.html
Thursday, November 22, 2012
Differences of RBI With Finance Minister
RBI differs with government on 4 issues
MUMBAI: Differences between the Reserve Bank of India and government are out in the open with RBI governor D Subbaraoon Tuesday spelling out four where it doesn't see eye to eye with the finance ministry.
Just a day after the government charted out a new fiscal consolidation plan to impress the RBI and induce a cut in interest rates, all the banking regulator did was cut the cash reserve ratio - the portion of deposits banks have to maintain with RBI - by 25 basis points, disappointing both the government and industry. Finance minister P Chidambaramissued a tersely worded statement in Delhi. "Growth is as much a challenge as inflation. If government has to walk alone to face the challenge of growth, then we will walk alone."
In a clear assertion that the finance minister was not impressed with RBI's guidance on interest rates, he said he had not read the last few paragraphs of the statement but if it holds out hope for the future he looked forward to that future. "Sometimes it is best to speak, sometimes it is best to remain silent. This is the time for silence," he said.
In RBI's post monetary policy press conference, the RBI governor said the bank had differences of opinion on the issues of interest rates, issue of new banking licences, acknowledging measures for fiscal consolidation and Islamic banking. Although traditionally governments and central banks take opposite sides in the growth-inflation debate, in recent days both sides have come out with sharp statements digging in their heels.
The governor too was quick to respond to the finance minister's observation. "The government is an important stakeholder in the Reserve Bank's policy. So we understand that the finance minister has a position, he represents the government, and we have respect for what the finance minister says," he said.
When asked about the issue of fresh banking licences announced by the finance minister in his budget speech, Mr Subbarao reiterated RBI's position that this would require amendment to the Banking Regulation Act which would give RBI more regulatory powers. The governor said that the finance minister had asked RBI whether it would be possible to issue licences if more powers were given to RBI without amending the Act. However, the RBI's contention is that even if RBI were given the power to supercede the boards of banks, it would also need legal sanction to control investments by single entities buying more than 5% equity in a bank. Most importantly, RBI is seeking the power for consolidated supervision of groups that banks belong to as this would block ability of corporate-sponsored banks to indulge in regulatory arbitrage.
The finance minister also made a strong pitch for easing given the centre's commitment to live within its means. "Government is doing its best to send the clear message that we are on the path of fiscal consolidation. It is my hope that everyone will read and understand the government commitment to path of fiscal consolidation," Chidambaram said. However, the RBI governor said fiscal deficit is a function of a number of factors and that everybody was looking for more details on how the fiscal roadmap is to be implemented.
The central bank had also received a proposal to consider whether it was possible to permit Islamic banking in India. "Current banking regulation require interest rates. RBI charges interest on the funds it provides banks under repo and it also pays interest. Also, we do not permit risk financing while Sharia finance takes a position on this. There is the issue of dual regulation by Sharia board and RBI. We have said that should the government want this, they should have a new law" said Subbarao.
http://timesofindia.indiatimes.com/business/india-business/RBI-differs-with-government-on-4-issues/articleshow/17026212.cms
MUMBAI: Differences between the Reserve Bank of India and government are out in the open with RBI governor D Subbaraoon Tuesday spelling out four where it doesn't see eye to eye with the finance ministry.
Just a day after the government charted out a new fiscal consolidation plan to impress the RBI and induce a cut in interest rates, all the banking regulator did was cut the cash reserve ratio - the portion of deposits banks have to maintain with RBI - by 25 basis points, disappointing both the government and industry. Finance minister P Chidambaramissued a tersely worded statement in Delhi. "Growth is as much a challenge as inflation. If government has to walk alone to face the challenge of growth, then we will walk alone."
In a clear assertion that the finance minister was not impressed with RBI's guidance on interest rates, he said he had not read the last few paragraphs of the statement but if it holds out hope for the future he looked forward to that future. "Sometimes it is best to speak, sometimes it is best to remain silent. This is the time for silence," he said.
In RBI's post monetary policy press conference, the RBI governor said the bank had differences of opinion on the issues of interest rates, issue of new banking licences, acknowledging measures for fiscal consolidation and Islamic banking. Although traditionally governments and central banks take opposite sides in the growth-inflation debate, in recent days both sides have come out with sharp statements digging in their heels.
The governor too was quick to respond to the finance minister's observation. "The government is an important stakeholder in the Reserve Bank's policy. So we understand that the finance minister has a position, he represents the government, and we have respect for what the finance minister says," he said.
When asked about the issue of fresh banking licences announced by the finance minister in his budget speech, Mr Subbarao reiterated RBI's position that this would require amendment to the Banking Regulation Act which would give RBI more regulatory powers. The governor said that the finance minister had asked RBI whether it would be possible to issue licences if more powers were given to RBI without amending the Act. However, the RBI's contention is that even if RBI were given the power to supercede the boards of banks, it would also need legal sanction to control investments by single entities buying more than 5% equity in a bank. Most importantly, RBI is seeking the power for consolidated supervision of groups that banks belong to as this would block ability of corporate-sponsored banks to indulge in regulatory arbitrage.
The finance minister also made a strong pitch for easing given the centre's commitment to live within its means. "Government is doing its best to send the clear message that we are on the path of fiscal consolidation. It is my hope that everyone will read and understand the government commitment to path of fiscal consolidation," Chidambaram said. However, the RBI governor said fiscal deficit is a function of a number of factors and that everybody was looking for more details on how the fiscal roadmap is to be implemented.
The central bank had also received a proposal to consider whether it was possible to permit Islamic banking in India. "Current banking regulation require interest rates. RBI charges interest on the funds it provides banks under repo and it also pays interest. Also, we do not permit risk financing while Sharia finance takes a position on this. There is the issue of dual regulation by Sharia board and RBI. We have said that should the government want this, they should have a new law" said Subbarao.
http://timesofindia.indiatimes.com/business/india-business/RBI-differs-with-government-on-4-issues/articleshow/17026212.cms
Intention of Finance Minister
Now FM Is Bent Upon To Destroy Indian Banking Sector - Regulators Are Our Only Hope
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