No sooner had the Street begun absorbing the news that the Reserve Bank of India (RBI) had stuck to its guns and not reduced the repo rate in its 30 October policy review, than another rocket was launched from New Delhi. In an uncharacteristic show of open displeasure, finance minister Palaniappan Chidambaram made his disappointment at the RBI stance known, by saying that if the government had to 'walk alone' to face the challenge of growth, then it would do so. Strong words from the finance minister at a time when the economy needs every possible coordinated effort to negotiate the current situation of slowing growth and high inflation.
To be fair to the RBI governor, his stance on interest rates has been no secret, and time and again Duvvuri Subbarao has made his views known on the subject. Whether it is the global economic situation, the spectre of continuing inflation or the supply side constraints, RBI has more than once articulated its stance why a rate cut is not immediately possible.
That inflation remains a clear and present danger is also evident from RBI's analysis in its October policy statement. Says RBI: "On the upside, persistent supply constraints may be aggravated as demand revives, resulting in price pressures. Rupee depreciation, which may result from global financial instability, will add to imported inflation. An important driver of inflation is the upsurge in both rural and urban wages, which is exerting cost-push pressures. Finally, as under-pricing in several products is corrected as part of the fiscal consolidation process, suppressed inflation is being brought into the open. As necessary a step as this is, it will result in higher inflation readings."
Subbarao's point is, RBI needs to be prepared for the emerging situation arising both out of global economic challenges and the domestic fiscal consolidation. And even as it underscores this point, the central bank does acknowledge that the current slowdown is "due to a host of factors, including monetary tightening." An important admission from a central bank caught in the classical growth-inflation dilemma.
The stance of the October policy also talks of the growth challenge. Two of the three expected outcomes of the policy, RBI says, are enabling liquidity conditions to facilitate a turnaround in credit growth to productive sectors so as to support growth and reinforcing the growth stimulus of the policy actions announced by the Government as inflation risks moderate (italics ours). Clearly, the finance minister's comment on 'walking alone' on growth looks a tad unfair.
Importantly, while large sections of corporate India may have been disappointed - rather predictably -- on RBI's refusal to reduce rates, some others seem to understand RBI's rationale. Says Y M Deosthalee, chairman and managing director, L&T Finance Holdings: "RBI has clearly demonstrated its independence and has not succumbed to pressures. It is a clear indication of the fact that the pressures of inflation have not yet abated leaving little room for RBI to reduce the rates. Global risks have heightened amidst a slowdown and revival in domestic growth hinges on efficient implementation of the reforms announced by the Government."
The RBI's guidance also points to a possibility of monetary easing beginning the fourth quarter of FY13. While the cash reserve ratio (CRR) cut of 25 bps was aimed at pre-empting a prospective tightening of liquidity conditions, RBI does believe that there is a 'reasonable likelihood' of further policy easing beginning January.
Why, then, did Chidambaram make his displeasure public? Viewed from the minister's perspective, time is clearly running out for the UPA government. With very few days left before the 2014 Union Budget (which will bring its own set of compulsions for the FM) and the elections in Gujarat and Himachal Pradesh before that, the FM is, perhaps, keen to step on the accelerator in terms of whatever arsenal he has at his disposal to try and get the economy back on track and send out the right signals. Besides, by outlining his fiscal consolidation plan a day before the RBI policy, Chidambaram seemed keen to send out the message that the government was now doing its bit in spurring growth and was hoping RBI would chip in with a rate cut to complete the picture. But Subbarao's reading was clearly different.
Subbarao has been measured in his response to the FM. The Times of India of 31 October quotes him as saying: "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 FM says." A very different tone from that of Chidambaram.
The takeaway from l'affaire 'Walk Alone' is twofold: it reinforces the fact that the RBI is an independent monetary authority, reading the economic signals and acting accordingly, even if it means differing with the government. Equally, Chidambaram's comment is proof that the government is keen to act quickly on addressing the slowing growth trajectory. The unfortunate thing, however, is that the differences have surfaced rather publicly.
Few will believe that RBI isn't concerned about bringing growth back on track. But the central bank believes inflation is still enemy number one. The government has every right to differ, but those differences needn't erupt in the public domain. Ironically, Chidambaram says this is the time for silence. If it is, then his 'silence' surely spoke a thousand words.