Subbarao's CRR balancing act torments Chidambaram

RBI view at variance with North Block

Subbarao's CRR balancing act torments Chidambaram

Apparently not enthused by the Reserve Bank of India’s (RBI) cautious stance, Finance Minister P Chidambaram on Tuesday said that growth is as much a challenge as containing inflation and the government would “walk alone” to face the challenge if it comes to that.

“Growth is as much a challenge as inflation. If the government needs to walk alone to face the challenge of growth, then we will walk alone,” he said, reacting to RBI’s second quarter policy review.

Chidambaram was apparently upset over RBI’s decision to leave interest rates unchanged on inflation concerns despite the government unveiling a five-year fiscal consolidation road map ahead of the policy.

“The 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 the path of fiscal consolidation,” Chidambaram said.

On the policy statement, he quipped, “I have not read the last few paragraphs of the statement but if it holds out hope for the future I look forward to that future.”
He was apparently referring to the RBI’s policy guidance of a likelihood of policy easing in the January-March quarter of the current fiscal.

Chidambaram further said, “Sometimes it is best to speak, sometimes it is best to remain silent. This is the time for silence.”

Unusually, RBI Governor Duvvuri Subbarao gave fairly explicit policy guidance, saying the central bank might ease policy in January to March, the final quarter of the fiscal year, when it expects inflationary pressure to ease. That implied it will not cut rates at its next review on December 18.

The central bank said it expects inflation, which hit a 10-month high of 7.8 per cent in September, to rise before easing in the final quarter of the fiscal year.

“While risks to this trajectory remain, the baseline scenario suggests a reasonable likelihood of further policy easing in the fourth quarter of 2012-13,” Subbarao said.

Investors, companies and the government have clamoured for a cut in interest rates to boost flagging growth. Interest rates have been on hold since April even as many other central banks cut rates, and remain some of the highest anywhere.

Since taking office three months ago, Chidambaram has made several moves to revive investment, clear economic bottlenecks and repair government finances. While he has sought support from the RBI in the form of policy easing, the hawkish Subbarao has said New Delhi needs to do even more.

While the RBI is not statutorily independent, it operates with a high degree of autonomy and Subbarao has resisted calls in the past from New Delhi to ease policy. “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,” Subbarao said.

Chidambaram’s plan to nearly halve the fiscal deficit in just over four years gave few specifics, but his announcement at a hastily called news conference on Monday was seen by financial markets as adding pressure on the RBI to cut rates.

“Recent policy announcements by the government, which have positively impacted sentiment, need to be translated into effective action to convert sentiment into concrete investment decisions,” Subbarao said in the policy review.

Meanwhile, the Prime Minister’s Economic Advisory Council (PMEAC) Chairman C Rangarajan said the central bank may cut interest rate only in January as inflation is unlikely to decline soon.

 Rangarajan said the central bank has taken a cautious stand in its monetary policy as inflation continues to remain high.

“Perhaps for a change in the policy rate, the RBI is waiting for a period or an opportune movement when there could be sustained decreases in interest rate. I think they would start doing it only in January, unless there is some strong tendency for inflation to decline in the next four-five weeks. That doesn’t appear to be likely at the moment,” he said.

Rangarajan, however, said that if the inflationary situation improves and there are any definite signs of decline, “perhaps the RBI may be wiling to do it even six weeks earlier than the January end”.

He further said that a cut in the CRR should be seen as an easing of the monetary policy as it “puts more liquidity in the hands of the banks and also improves their profitability”.

Likewise, the bond market investors were disappointed that the CRR cut suggested the central bank would delay expected bond purchases.

India’s 10-year bond yield closed 5 basis higher at 8.18 per cent and the one-year overnight indexed swap rate ended 12 basis points higher at 7.70 per cent.

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