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No disconnect between RBI and government: FM

No disconnect between RBI and government: FM
While Jaitley said there were regular interactions between the government and the central bank, Governor Raghuram Rajan opined that the proposed agency for managing government borrowing should be independent of the government and the RBI.

Emerging from the first post-Budget meeting between the Finance Minister and the RBI board, Rajan said future interest rate cut will depend on the pattern of inflation which could be impacted by recent unseasonal rains and hailstorms.

"We have complete free and frank discussions and therefore there is no question of any disconnect ... between the bank and the government, I have repeatedly clarified that," Jaitley said after the meeting which among other things discussed macroeconomic developments and operations of RBI.

Jaitley in his budget had proposed to shift powers to regulate trading in government bonds from RBI to capital market regulator Sebi. Besides, two have also reportedly differed on the Monetary Policy Framework Agreement that aims to bring inflation down to a pre-decided level.

"As far as proposals in the Finance Bill are concerned they are before Parliament. Some of them we discussed earlier, we discussed them even now ...I don't wish to comment at this stage," he said.

He further said that discussion between the government and the RBI always continues. "They (discussions) have been beforethe budget and have taken place after the budget as well," he said.

When asked whether banks would be pressurised to pass on rate cuts to consumers, Jaitley said government does not put pressure on banks but hopes, and it is hopeful that they would do it in line with the RBI policies.

On possibility of further easing of policy rate, Rajan said: "The primary factor in allowing for greater monetary easing will be the pattern of inflation and how that proceeds."

"We do not put pressure on them (PSU banks for interest rate cut). We only expect and our expectations come true," Jaitley said.

While the RBI has cut interest rates by 0.50 per cent between January-March, only a few banks have lowered their rates since January 15, when RBI announced the first of its two successive rate cuts.

Some of the banks had said at that time that they would wait for further signals on RBI's monetary policy on April 7 before passing on the benefits to their retail and corporate borrowers.

As far as future rate cut by the RBI is concerned, Rajan said, it would primarily depend on the domestic price situation and partly on global factors, especially hike in rates by the Federal Reserve.

Asked whether the dovish statement by the US Federal Reserve would impact monetary policy decisions at home, Rajan said the primary factor deciding interest rates would be inflation.

"While external environment is a constraint, a lot of what we need to do has to do with the internal environment. As the Fed start raising interest rates, my reading of the latest statement is they may take a little longer... But I do not think that will impinge on the process in India."

Last week the Fed said it has removed a pledge to remain "patient" on raising rates, signalling a possible mid-year rate increase.

Pitching for independence of Public Debt Management Agency (PDMA), Rajan said it was "desirable" that the agency as a professional organisation, should be independent of the central bank and the government.

"Because it puts some discipline on the government debt process and also frees regulation of the need to create some sort of financial impression," he said.

Public debt is currently managed by the Reserve Bank of India (RBI).

The Budget for 2015-16 has proposed setting up of PDMA with the objective of minimising the cost of raising and servicing public debt over the long term within an acceptable level of risk at all times, under the general superintendence of the Central Government.

On the impact of unseasonal rains and hailstorm on farm output, Rajan said, "As far as rains go, there is no direct one-to-one correlation between rains and prices. It depends on what crops (are impacted).

"What it means is that we have to be more careful in food management and government has repeatedly said it is looking at food prices and is engaged actively in food management. It needs greater vigilance."

Answering questions on the fiscal deficit situation, Rajan said that the government has taken a number of steps and much would depend upon external and internal environment, especially the disinvestment programme which is dependent on the markets.

"It (fiscal deficit) also depends on the actions of the state governments. So, we have to look at all these to see how much fiscal consolidation is happening over the course of year given the intent that has already been expressed," he said.

The government proposes to bring down the fiscal deficit to 3.9 per cent of GDP in 2015-16 from 4.1 per cent estimated in the current fiscal.

When asked about cut in expenditure on the social sector scheme, the Finance Minister said "actual expenditure on these sectors is on the increase. It is just that mode of expenditure has changed because of the recommendation of the 14th Finance Commission."

A large part of the expenditure of these sectors is going to be undertaken by the central government and because of larger devolution to the states, the states are also going to additionally add to that expenditure, he said.

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