The Telegraph
Tuesday , February 18 , 2014
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Bid to rejig roles & resources
RBI gets a reminder on dual duty

(From left) Finance ministry officials Sumit Bose, Arvind Mayaram and Rajiv Takru in New Delhi on Monday. (PTI)

Mumbai, Feb. 17: Finance minister P. Chidambaram has touched another raw nerve in relations between North Block and Mint Road, articulating a dual agenda for the RBI that focuses on both price stability and growth.

“The RBI must strike a balance between price stability and growth while formulating the monetary policy,” Chidambaram said today, while announcing the interim budget of 2014-15 in Parliament.

“In a developing economy we must accept that when our aim is high growth there will be a moderate level of inflation,” he added.

The finance minister had in the past expressed his displeasure over the RBI raising interest rates as he wanted the central bank to partner the Centre’s effort in pushing growth.

This was particularly evident during the tenure of former RBI governor Duvvuri Subbarao, when Chidambaram had said, “Growth is as much a challenge as inflation. If the government has to walk alone to face the challenge of growth, we will walk alone.”

Banking circles said the confrontation was not showing any signs of easing as Chidambaram’s views on the issue today put the finance ministry and the RBI under Raghuram Rajan on another collision course.

Rajan, who took over the mantle from Subbarao in September last year, took everyone by surprise in January when he hiked the policy rate for the third time by 25 basis points to tackle retail inflation, reiterating the central bank’s resolve to control rising prices.

Recently, Rajan had pointed out that while inflation was a “destructive disease”, there could be no trade-off with growth. According to the RBI governor, elevated levels of inflation erode household budgets and constrict the purchasing power of consumers, thereby hurting growth.

Recently, RBI deputy governor Urjit Patel came out with a report on the framework for the conduct of monetary policy which rejected the dual mandate. The report recommended that the RBI’s monetary policy ought to focus on prices alone and that too inflation measured on the consumer inflation gauge.

Analysts fear if the RBI adopts this recommendation, the possibility of a rate cut may get postponed in the near future.

The finance minister further said the recommendations of the Financial Sector Legislative Reforms Commission (FSLRC), which require no changes in legislation, must be implemented immediately.

The FSLRC, headed by B. Srikrishna, had in March last year suggested that a monetary policy committee be formed to take policy decisions. It had suggested that the committee should consist of a non-voting member which will articulate the views of the finance ministry.

The Urjit Patel committee report did not provide any role for the central government in the conduct of the monetary policy.

Sources said that while some of these changes could require legislative tweaks, Chidambaram could pursue them if he returned as the finance minister after the general elections.