Arun Jaitley steps up pressure on RBI to cut rates

  • Reuters, New Delhi/Mumbai
  • Updated: Aug 21, 2015 10:03 IST

Union finance minister Arun Jaitley stepped up pressure on the Reserve Bank of India (RBI) to cut rates, with some bureaucrats working behind the scenes to argue for an immediate cut of as much as 50 basis points to aide the struggling economy.

After another weak quarter of corporate earnings and July inflation that undershot the central bank's medium-term target, Jaitley made direct, public calls for faster easing, clashing with far more cautious comments from a conservative Reserve Bank of India governor Raghuram Rajan.

Officials from the ministry are encouraging economists and newspapers to lobby directly for further easing, senior government officials said.

The public stand-off between the finance ministry and the RBI continues as the two sides are already at odds over key changes to the way India takes monetary policy decisions and the government's say in such matters.

"Hopefully, the impact of inflation being under control is a factor which ... the central bank, with all its wisdom, will take note of," Jaitley told a gathering of bankers and executives at Mumbai earlier this week.

While India's economic growth is outpacing China's on paper, the picture is different on the ground, where government spending has been sluggish, consumption weak and corporate executives fret a recovery is unlikely before 2016-17.

The government is also emerging from a bruising monsoon session in Parliament, which delayed tax and land reforms critical to accelerating growth.

There are concerns that growth could slip below the target of 8 to 8.5% for the year to March, and RBI's cautious approach may worsen the situation. Global rating agency Moody's, earlier this week, lowered India's growth forecast to 7%, from 7.5%.

"Going by the (consumer price) inflation numbers, and the global economic environment, the RBI should have cut interest rates by 200 basis points (this year) by December," said one ministry official who works with Jaitley.

"It has done too little and too late."

The RBI has cut 75 basis points since January.

Another government official said the central bank has the scope to immediately cut at least 50 basis points off rates, that are now at 7.25%.

Monsoon worries

The RBI, however, has remained far more cautious, specifically on the outlook of the monsoon season, which has roughly another month to run and has a huge influence on food prices in the country.

Government officials have been upbeat in their assessment of the monsoon, with the rain shortfall currently estimated at around 9%, but Rajan has been more circumspect.

His tight rein on inflation has benefited the government; rising prices are a major concern for Indian voters, and inflation was in double digits when the former International Monetary Fund chief economist took over in 2013.

But that is now irking a government whose officials complain they do not get sufficient insight into the dashboard of data that contribute to RBI decision-making.

Though lauded by the government, July's inflation below 4% is yet to satisfy the bank, which, sources with knowledge of RBI policymaking say, frets that core inflation, which excludes food and fuel, remains high.

The bank is even more nervous about food prices. Onions, the mainstay of many Indian dishes, have more than tripled in price since June 1 to almost two-year highs.

"It is to be seen if CPI persistently undershoots the RBI's projections," a source familiar with the RBI's thinking said. The monsoon shortfall prediction, he said, made a rate cut before the next scheduled policy review on September 29 "very difficult".

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