Distance widens between North Block and Mint Road

Immediately after Reserve Bank of India Governor YV Reddy hiked the short-term policy rate on July 26, Finance Minister P Chidambaram whole-heartedly endorsed the central bank's stance.

Bankers heaved a sigh of relief that North Block and Mint Road had finally buried the hatchet, and started talking in one voice on interest rates.

A week later, bankers know it was a temporary truce: The governor and the finance minister continue to have different views on the direction of interest rates.

In fact, Mint Road was kept in the dark about the finance ministry's directive.

A senior banking division bureaucrat met Reddy at his office today, but what transpired at the meeting was not known. Officially, the RBI was not willing to comment on the development.

Reddy, in his days as banking secretary in the mid-1990s, was often heard talking to public sector bank chiefs on phone, asking them to participate in government bond auctions for smooth sailing of the government's borrowing programme. Technically, that was moral-suasion.

The banks had no qualms in responding to the banking division's overtures as they were wholly owned by the government, and the industry was less competitive at that point of time. Today, the situation is different.

"Given a choice, we would have liked to wear black badges to mark our protest," a bank chairman pointed out.

In the Congress-led coalition government's regime, the story so far has been of gentle persuasion by the finance ministry, urging the banks not to hike interest rates as that would derail the growth story.

Chidambaram harped on this issue at successive closed-meetings with bankers, ever since the rates started rising. Despite a series of policy rate hikes by the RBI, public sector bankers did not tinker with their lending rates till April this year.

In fact, the State Bank of India had rolled back its home loan rate hike last year as it did not go down well with the North Block.

The government has now become more aggressive and started directing the banks on where to lend and at what price. Former finance minister Jaswant Singh had made the Indian Banks' Association (IBA) informally direct the banking industry to offer small loans at 9 per cent.

Chidambaram recently went one step ahead, and formally brought down the interest rate for firm loans up to Rs 3 lakh to 7 per cent.

Mint Road was not convinced with the move, and the RBI governor had to fight with the government for a budgetary allocation to compensate the banking industry on the subsidised loan. Will Reddy react the same way now?