The noise over rift between FinMin and RBI starts yet again…

Central Bank independence crowd again smells blood. RBI’s statement yesterday  was just the perfect recipe to ignite the fire.

The Government had asked RBI MPC to meet a team of Finance Minstry officials headed by Chief Economic Adviser. But in the MPC media meeting yesterday, RBI revealed all members refused to meet the Finance Ministry!

And we knew what will happen next. There are so many reports in media today over the rift between the two entities. Sample this:

North Block and the Reserve Bank of India seem to be once again holding differing views on interest rates after the second bi-monthly monetary policy review. They don’t seem to be on the same page as regards the monetary policy decisions taken on Wednesday.

Chief Economic Advisor Arvind Subramanian said he respected the monetary policy decisions announced on Wednesday, keeping lending rates on hold but indicated he was disappointed with them.

He then painted an alternative macro-economic assessment, characterised by low inflation and slowing growth, to make the case for lower rates.

With economic growth slowing to just over 6 per cent in the fourth quarter of the last fiscal and low inflation levels, the government and industry were hoping for a lending rate cut to help boost investments.

But in an indication that it was in no mood to heed such calls, the six-member MPC unanimously declined a meeting with finance ministry officials ahead of the policy review, RBI Governor Urjit Patel said. The meeting was expected to be held on June 1 and 2. Finance Minister Arun Jaitley is on a four-day trip to Paris.

Subramanian said there is a “plausible alternative macro-economic assessment” as real policy rates are tight and rising at a time of low inflation and slowing growth. The appreciating real exchange rate makes monetary policy conditions even tighter, he added.

Speaking to reporters, he said headline inflation has been running well below the target while growth in the real economy has decelerated from last July as suggested by a number of indicators such as real GVA, IIP and credit to industry.

“The outlook for growth is unlikely to warrant any serious concern about closing output gaps – and hence stoking inflation structurally – because of the twin balance-sheet problem, which is keeping investments weak, ongoing fiscal consolidation and the appreciating real exchange rate,” he said, adding that personal loan growth, which proxies consumption, has also been decelerating recently.

More here, here and everywhere..
Despite banks always telling you that central bank interest rates hardly matter as much, the noise continues.
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