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Finance ministry, RBI on track to fight inflation together

The RBI governor is expected to keep the repo rate unchanged for the second consecutive policy review

BS Reporter  |  Mumbai 

If Reserve Bank of India (RBI) Governor Raghuram Rajan’s statement days before the central bank’s bi-monthly monetary policy review is any indication, tension between the finance ministry and could well be a thing of the past.

Amid speculation that the new government might replace the high-profile central bank governor, following comments from second-rung leaders of the Bharatiya Janata Party (BJP) in the run-up to the general elections, Rajan on Friday said he expected to work with the new government to reduce

The BJP-led National Democratic Alliance (NDA) formed the government at the Centre, following a landslide victory in the elections.

Speaking at a seminar in Tokyo, Rajan said the new government’s plan to curb food seemed sensible, adding he expected the public’s expectations to fall, Reuters reported. “There is a sense of conviction about our plan to bring down to eight per cent this year and six per cent next year. This information has got out to the public. The public’s expectations have fallen and I think expectations will fall further,” the agency quoted Rajan as saying.

Rajan, former chief economist of International Monetary Fund, is known as an hawk. Rather unexpectedly, he began raising interest rates soon after he took charge as governor, amid a currency crisis in September 2013. Between September and January, he has raised the key policy rate, or repo rate, by a total of 75 basis points. Inflation, particularly retail inflation, has been stubbornly high through the past three years, around double-digit levels. Consumer Price Index-based is double the central bank’s medium-term target of four per cent.

Rajan comments on Friday come days before the central bank announces its monetary policy review, scheduled for Tuesday. He is expected to keep the repo rate unchanged for the second consecutive policy review. Though rose in April, its trajectory was along the central bank’s projection.

A senior finance ministry official said on Friday it is dificult for to cut interest rates when is high.

Rajan said he was worried about non-performing assets in the banking system, adding he wanted to work with the new government to address this concern.

As far as ties between the government and the central bank are concerned, many see a new era being heralded. After Arun Jaitley, a lawyer and a seasoned politician, took charge as finance minister, Rajan was among the first to meet him. Sources said the meeting lasted 50 minutes. After the meeting, Rajan and Jaitley gave separate statements to the media; both mentioned the needed to tackle and revive growth.

“We have to restore the pace of growth, contain and concentrate on fiscal consolidation,” Jaitley had said.

“It (curbing inflation) is absolutely a task the government and are engaged with,” Rajan said after the meeting. “has always maintained a balance between growth and

This is in contrast with the ties between P Chidambaram, finance minister under the United Progressive Alliance government, and D Subbarao, Rajan’s predecessor. In September 2008, was handpicked by Chidambaram; he was the first bureaucrat to join Mint Road directly from the government. In the initial days, and together fought the effects of the global financial crisis on India.

However, ties between the two took a turn when sought a cut in the policy rate to spur growth, but the governor declined to oblige. “Growth is as much a challenge as If the government has to walk alone to face the challenge of growth, we will walk alone,” an apparently upset had told reporter after the October 2012 policy review. At that time, had steered clear of a cut in rates, despite a road map for fiscal consolidation presented by a day before the policy.

“I do hope Finance Minister will one day say, ‘I am often frustrated by the Reserve Bank; so frustrated that I want to go for a walk, even if I have to walk alone. But thank God, the Reserve Bank exists’,” had said in his last public lecture as governor.

From walking alone to working together, relationship between North Block and is set to change.

First Published: Sat, May 31 2014. 00:02 IST