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FinMin tight-lipped on RBI's stance

Source : BUSINESS_STANDARD
Last Updated: Fri, Sep 20, 2013 21:20 hrs
Finance Minister p Chidambaram<br>

The finance ministry didn't give an official reaction to Reserve Bank of India (RBI) Governor Raghuram Rajan's mid-quarter monetary policy review on Friday, a departure from its practice of either endorsing the central bank's stance or implicitly attacking it.

About a year ago, when then RBI governor D Subbarao didn't cut the policy rate, Finance Minister P Chidambaram had said he would walk the growth path alone.

On Friday, Rajan announced a rise of 25 basis points in the repo rate. Though the move spooked markets, Chidambaram remained tight-lipped.



On Thursday, too, when the US Federal Reserve surprised many by announcing it would continue with its bond-buying programme, he refused to reply to queries. "It is business as usual for us," was the official refrain in the ministry in response to the Fed's move.

Economic Affairs Secretary Arvind Mayaram, who had conveyed the ministry's view on Thursday, also evaded queries.

Ministry officials weren't surprised by RBI's announcement on Friday. They said they didn't feel the central bank governor cared only about inflation and ignored growth altogether.

An official said RBI had narrowed the corridor between the reverse repo rate (6.5 per cent) and the marginal standing facility (MSF), within which call money rates moved.

In its policy review on Friday, RBI cut the MSF by 0.75 percentage points to 9.5 per cent.

The official said now, call money rates would decline, and this would aid growth. "The repo rate is operationally ineffective. It is used to give a broad signal RBI is worried over inflation, as the headline number is still high," he said.

While Wholesale Price Index-based inflation rose to 6.1 per cent in August from 5.8 per cent in July, Consumer Price Index-based inflation rose to 9.52 per cent from 9.64 per cent.

On the markets plummeting following RBI's announcements, officials said these would recover once the actual rationale behind RBI's move dawned.

On India Inc criticising the central bank's move, they said RBI couldn't ignore inflation. One should keep in mind the fact that inflation had been reduced to sub-five per cent levels from 10 per cent a few years ago, they said, adding to bring down inflationary expectations, RBI had to raise the repo rate.

If RBI hadn't raised the rate, inflationary expectations would have hit economic growth in the medium term, they said.



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