New policy framework bonds Centre and RBI
One area of reform that has escaped general media attention following the presentation of the Union Budget for 2015-16 is the announcement of a new monetary policy framework jointly by the Government and the Reserve Bank of India. The policy, which kicked off on Monday, lays down a structured mechanism through which the Government and the RBI can together take ownership in containing inflation. While this would lead to a greater role for the central bank, it would also mean that the RBI cannot shrug off responsibility for troublesome inflationary trends. On its part, the Government will be under greater pressure from the bank to keep inflation down to reasonable limits. The two-way arrangement is likely to enhance levels of understanding and communication between the Centre and the Reserve Bank of India.
The monetary policy framework will also have the scanner more focussed on the RBI's moves towards cutting down interest rates. For long, many in the political establishment have been maintaining that the central bank was disconnected with the ground realities when it came to the need to propel growth, and that its leaning was towards containing inflation even if growth was hit. The pressure to reduce interest rates has always haunted the RBI, and successive Governors of the bank, including incumbent Raghuram Rajan, have had to face the music of industry and sections of the Government on this count. Mr Rajan's recent comments on Make in India and even on interest rates had given the impression that he was somewhat out of sync with the Narendra Modi Government's objectives. But that may have been more speculation than reality. Now, with the new policy framework in place, the RBI will hopefully be better synchronised with the aims and aspirations of the Government, and the two can work more purposefully toward reconciling between high growth and low inflation. The last thing that industry and the economy in general need is a stand-off between the Reserve Bank of India and the Union Government. The new monetary policy sets to rest any such fear.
So, the one good thing that can come about as a result of this greater understanding and cooperation mechanism signed between the Government and the RBI is that the central bank may now be less reluctant to drop interest rates, since it will be officially in the loop on measures the Government is taking to check inflationary trends. The inflation target for 2015-16 has been pegged at six per cent, which by all accounts is a comfortable figure. On this premise, industry is expecting an early cut by at least 50 basis points in the RBI's lending rate, to begin with. Unless reasonable rate reductions happen soon, Union Minister for Finance Arun Jaitley's hopes of a sustained annual growth rate of nine per cent to 10 per cent over the coming years will not be met. The RBI will not want that to happen.