Chidambaram not enthused by RBI's stance

Upset over RBI's decision to leave interest rates unchanged on inflation concerns despite govt unveiling 5-yr fiscal consolidation road map

Yesterday, the North Block and the Mint Road seemed to be in sync. Today differences between the two sides over RBI's monetary stance came to the fore.

Finance Minister P Chidambaram nearly criticized the Reserve Bank of India’s decision to keep the key policy rate unchanged and said the government would fight alone to meet the challenges of growth, if the situation comes to that extreme.

“Growth is as much a challenge as inflation. If the government has to walk alone to face the challenge of growth, then we will walk alone,” Chidambaram told reporters after RBI kept the repo rate unchanged.

He went on to add, “Sometimes it is best to speak, sometimes to remain silent; this is the time for silence.”

The government seemed to have distanced itself from the central bank’s decision which is based on the premise of fighting high inflation. The finance minister said both growth and inflation were equally big problems and that the government was doing its best to send a clear message that it was on the path of fiscal consolidation.

The RBI’s decision to maintain a status quo on repo rate and cut cash reserve ratio by 25 basis points came a day after the finance ministry laid down its revised fiscal consolidation roadmap.

The target to restrict fiscal deficit to 5.3% of GDP this year and 3% by 2016-17 had fuelled speculations that RBI would aid government’s effort to spur growth by reducing the policy rate. The central bank, however, only gave a hope of some easing in early 2013.

“It is my hope that everyone will read and understand the government’s commitment to the path of fiscal consolidation. I haven’t read the last few paragraphs of the (monetary policy) statement but if it holds out hope for the future, I look forward to that future,” Chidambaram said.

Other government functionaries also echoed similar sentiments. Planning Commission deputy chairman Montek Singh Ahluwalia, who also chose not to comment “in detail” on the RBI’s decision, said the reduction in CRR was a good move but there was a need to push growth along with inflation.

“Monetary policy is an important push for the growth; the fiscal push depends on the consolidation. That’s what the finance minister has said. A sufficient amount has been done to start in the other policy; the RBI itself seems to have indicated that it is looking towards the future,” he added.

The government’s fiscal deficit plan unveiled on Monday was short of details and today RBI also said it would look for little more details on it, while it stressed on the need to contain inflation.

“There is a case for an interest rate cut because we needed a signal… Eventually the RBI and the government will have to work together,” said economic affairs secretary Arvind Mayaram.

India's economic growth declined to nine-year low of 6.5% in 2011-12. In the last quarter of 2011-12, the GDP grew just 5.3%. The economic growth slightly picked up to 5.5% in the first quarter of the current fiscal.

Inflation, on the other hand, did not show any tendency to slow down, particularly after diesel prices were raised by Rs 3 a litre and subsidised LPG cylinders were capped at 6 a family in a year. The wholesale-price inflation rose to 7.81% in September from 7.55% in August.