ISSN (Print) - 0012-9976 | ISSN (Online) - 2349-8846

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Government and RBI

No Real Stand-off over Macro Policy

The so-called stand-off between the Reserve Bank of India and the Ministry of Finance is not as significant as the media is making it out to be. There is little disagreement between the two on fundamental issues. The stand-off is a reflection of the government's effort to regain some influence over macroeconomic management, which is reasonable as the government is accountable to the people whereas the RBI is not.

The Indian media are agog with speculation of an ostensible stand-off between the Ministry of Finance and the Reserve Bank of India (RBI) on matters relating to macroeconomic management. “Leading” statements from the Governor of the RBI, Raghuram Rajan, and the Union Finance Minister, Arun Jaitley, a much-publicised set of meetings between the two and the signing of a Monetary Policy Framework Agreement (MPFA) in February 2015, have only fuelled such speculation.

The substance of the speculation is that efforts are on in the finance ministry to clip the RBI’s powers in a host of areas, which is being resisted by the latter. The finance ministry’s push is seen as illustrated by a number of recent initiatives or developments. First, there is ostensibly an effort by the government to check the RBI’s growing inclination to make inflation targeting its primary goal to be pursued “independently,” by entering into a formal MPFA between the RBI and finance ministry, the first of which was signed on 20 February 2015. The agreement ensures that inflation targets are set by the RBI in consultation with the finance ministry and requires the RBI to make public the operational procedures to be adopted to attain those targets, as well as the evidence of their effectiveness and the explanation for shortfalls if any.

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