 "Is the Raghuram Rajan-Chidambaram bonhomie too good to be true?")
Call it an impact of mere external circumstances or deft handling by the new guard -- Raghuram Rajan -- at RBI, the North Block no longer perceives the Mint Road as drifting away from goals set by the Finance Ministry. At least, it does not show its displeasure with the central bank publicly, a scene quite contrasting to D Subbarao's time.
Rajan increased the repo rate in his mid-quarter monetary review last month and finance minister P Chidambaram remained quiet. He may even support another one this month possibly for two reasons: change in its focus from growth to financing of current account deficit and stature of Rajan.
“After the US Federal Reserve in May announced that it would start tapering its stimulus, the priority has shifted from growth to stable foreign inflows,” said a finance ministry official, adding the RBI and the government are very much on the same page now.
The finance ministry’s silence on rate hike by RBI could not be entirely attributed to a change in the economic situation. Officials said Rajan is a man of international repute and if the government criticizes his moves it would not go down well with markets and investors.
Indian currency, which was hitting a new low every day in August, started strengthening soon after Rajan took charge as RBI Governor on September 4.
The finance ministry is also expecting a more cordial relationship with Rajan on other issues such as setting up of the Debt Management Office (DMO) in the finance ministry. While Subbarao had made his opposition on this issue very clear, Rajan is not likely to oppose it.
Another official said Rajan was in favour of it when he was the Chief Economic Adviser in the finance ministry. He, however, added the central bank was fundamentally opposed to shifting DMO to finance ministry and the new Governor’s views would not reflect the opinion of the entire institution. Moreover, there have been instances in past where bureaucrats moving from the finance ministry to RBI have opposed their own stand.
When Chidambaram returned to the Finance Ministry from another corner in the North Block -- Home Ministry -- only a little over a year was left of Subbarao's extended five-year tenure. Subbarao's predecessor Y V Reddy also had skirmishes with the North Block on the issue of autonomy and fiscal consolidation. However, the finance minister showed his disappointment with monetary stance taken by Subbarao when the former had already announced a five-year fiscal consolidation road map.
Rajan is still in the honeymoon period. Criticizing the governor from the beginning itself would take sting out of the criticism, analysts say. Moreover, taking on Rajan is not the same as opposing Subbarao's policy since the former is renowned world over for his commentaries on the financial world.
The rift between the Finance Ministry's fiscal policy and the RBI's monetary stance is yet to come to the fore. The ministry has been saying that it would rein in the deficit at 4.8% of GDP in 2013-14, despite first five months yielding 75% of that target. The wedge will come out in open in case the finance ministry could not do so because of widening subsidies and expected shortfall in revenue.
How deftly Rajan will handle that situation is yet to be seen. May be, like his predecessor he also wishes the Finance Minister to say, "thank God! RBI exists." Time will tell whether Chidambaram indeed says so.
Rajan increased the repo rate in his mid-quarter monetary review last month and finance minister P Chidambaram remained quiet. He may even support another one this month possibly for two reasons: change in its focus from growth to financing of current account deficit and stature of Rajan.
“After the US Federal Reserve in May announced that it would start tapering its stimulus, the priority has shifted from growth to stable foreign inflows,” said a finance ministry official, adding the RBI and the government are very much on the same page now.
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The finance ministry, however, cannot completely ignore growth, which fell to a decade low of 5% in 2012-13 and is expected to be in the same range this year. Last week, Rajan met Chidambaram and the two decided to provide additional capital to banks for lending to auto and consumer durables sector. The central bank complemented this by reducing the Marginal Standing Facility rate — at which it provides overnight emerging funding to banks — by 50 basis points. It will also provide additional liquidity through term repos of 7-day and 14-day tenor.
The finance ministry’s silence on rate hike by RBI could not be entirely attributed to a change in the economic situation. Officials said Rajan is a man of international repute and if the government criticizes his moves it would not go down well with markets and investors.
Indian currency, which was hitting a new low every day in August, started strengthening soon after Rajan took charge as RBI Governor on September 4.
The finance ministry is also expecting a more cordial relationship with Rajan on other issues such as setting up of the Debt Management Office (DMO) in the finance ministry. While Subbarao had made his opposition on this issue very clear, Rajan is not likely to oppose it.
Another official said Rajan was in favour of it when he was the Chief Economic Adviser in the finance ministry. He, however, added the central bank was fundamentally opposed to shifting DMO to finance ministry and the new Governor’s views would not reflect the opinion of the entire institution. Moreover, there have been instances in past where bureaucrats moving from the finance ministry to RBI have opposed their own stand.
When Chidambaram returned to the Finance Ministry from another corner in the North Block -- Home Ministry -- only a little over a year was left of Subbarao's extended five-year tenure. Subbarao's predecessor Y V Reddy also had skirmishes with the North Block on the issue of autonomy and fiscal consolidation. However, the finance minister showed his disappointment with monetary stance taken by Subbarao when the former had already announced a five-year fiscal consolidation road map.
Rajan is still in the honeymoon period. Criticizing the governor from the beginning itself would take sting out of the criticism, analysts say. Moreover, taking on Rajan is not the same as opposing Subbarao's policy since the former is renowned world over for his commentaries on the financial world.
The rift between the Finance Ministry's fiscal policy and the RBI's monetary stance is yet to come to the fore. The ministry has been saying that it would rein in the deficit at 4.8% of GDP in 2013-14, despite first five months yielding 75% of that target. The wedge will come out in open in case the finance ministry could not do so because of widening subsidies and expected shortfall in revenue.
How deftly Rajan will handle that situation is yet to be seen. May be, like his predecessor he also wishes the Finance Minister to say, "thank God! RBI exists." Time will tell whether Chidambaram indeed says so.