NEW DELHI: In a significant development, the issue of lower interest rates once again cropped up at the customary post-budget meeting of the Reserve Bank of India board, which is attended by the finance minister.
While the discussions usually centres on the budget proposals, on Saturday, finance minister Arun Jaitley is said to have raised some of points that RBI had in the past flagged as concerns to hold interest rates steady at a time when the government believed that a window was available as inflation was benign and growth rates were moderate.
Sources told TOI that it was pointed out that the impact of higher allowances to government employees due to the recommendations of the 7th pay commission had been absorbed – and contrary to RBI’s fears, the impact had been moderate.
Similarly, after racing to over $70 a barrel crude oil prices seemed to have plateaued. In fact, at the joint press conference with Jaitley, RBI governor Urjit Patel said that prices can move either way and during the last few days, it had softened. On his part, the finance minister suggested that it was hypothetical to discuss the impact of higher oil prices on inflation and interest rates.
Amid concerns of a possible adverse impact on inflation due to the government’s move to increase the minimum support price for agricultural products, Jaitley said the issue was raised during the meeting but described it as an “academic discussion”.
Hours after presenting the budget, Jaitley had told TOI in an interview that the impact of higher MPS would be limited. Days later, RBI had said that the fallout needed to be assessed.
Although the finance ministry and RBI have had different views on rate movement last year, chief economic adviser Arvind Subramanian had on January 29 suggested that the window for paring rates may have closed due to rising inflation as well as an improvement in the growth rate.
On Saturday, Patel said that in recent months banks were doing a better job at passing on the benefits of lower policy rates to borrowers. “One of the banks reduced its MCLR. In terms of transmission, if you measure since the easing cycle started and you compare the MCLR, there has been a very good transmission. The transmission started late and some of it came strongly after demonetisation (in November 2016),” he said.
The issue of inflation, and its possible impact on interest rates comes at a time when economic activity is picking up and there is expectation of a rate hike in the coming months, although the RBI held policy rates steady for the time being.