RBI governor Urjit Patel (File photo)

NEW DELHI: The government’s honeymoon with Reserve Bank of India governor Urjit Patel seems to be over within a year of his appointment. It had expected him to aid in the effort to accelerate growth through steps such as lowering of interest rates and other revival measures, but he has not obliged. Beyond a 25-basis point reduction soon after he took charge last September, Patel has held rates.

Unlike his predecessors, Patel is not solely responsible for deciding interest rates; that responsibility now rests with the Monetary Policy Committee , headed by the RBI governor. It has two other RBI representatives, and three government nominees. Nevertheless, an influential section within the government believes the RBI has been unsympathetic to its concern over persisting high interest rates and reluctant to take advantage of the room afforded by a comfortable fiscal situation and inflation, which is within the central bank’s comfort zone of 2-6%.

The government has not concealed its disappointment over the functioning of the MPC, including that of its own three nominees. A mail sent to RBI on Monday seeking its response went unanswered by last reports.

The world over, interest rates have often been a bone of contention between governments and central banks. But in this case, the disappointment stretches beyond a single issue. A certain frustration has set in over the RBI’s stonewalling of attempts of ministries such as power and transport to revive stalled projects through a package of measures. “It is not even willing to listen to the concerns of government departments,” said a senior official at the Centre, reflecting deepening disappointment over Mint Road's “inflexibility”.

Similarly, the banking regulator is seen to be moving slowly on tackling the mountain of non-performing assets (NPAs). Even banks have been critical of the manner in which the RBI has dealt with their concerns— and some top bankers are learnt to have conveyed their grievance to the finance ministry. This, in part, prompted the ordinance allowing the government to “authorise” RBI to issue instructions to banks to resolve specific NPAs by initiating insolvency proceedings.

In addition, the RBI was empowered to set up committees to advise banks on stressed asset resolution. Even this has not yet borne results. “A month after the ordinance was promulgated, case-specific decisions have not been taken,” said a senior government official who did not wish to be identified discussing a sensitive issue.

Red flags within the government first went up over the manner in which the RBI handled the Election Commission’s request for higher cash withdrawal limit for candidates contesting assembly elections in Uttar Pradesh and four other states. The poll watchdog, a constitutional authority, had wanted the limit to be enhanced from Rs 24,000 to Rs 2 lakh when demonetisation driven limits were in place. The RBI said 'no,' prompting a strong letter from a junior EC officer to the governor.

The reluctance of the bank to deal with “real-life” situations has since manifested itself in diverse ways, complicating matters for a government that is eager to accelerate growth, according to officials in the capital. On the issue of interest rates, independent economists such as SBI’s Saumya Kanti Ghosh and Bank of America Merrill Lynch’s Indranil Sengupta have suggested that inflation will be lower than projected, while Crisil's DK Joshi has backed a rate cut. “If you look at the arguments for not cutting rates, it’s the same-old same-old,” said a government official, adding that the central bank seemed reluctant to accept that an improved inflation and fiscal situation had helped mitigate the fear of global economic uncertainty, possibility of a spike in oil prices, and a possible return of high prices.

Lower interest rates are seen as an absolute imperative given the continuing low appetite for loans, partly caused by the weak financials of several companies grappling with stalled projects and sticky loans. Ironically, Patel is coming across as more hawkish than his predecessor, Raghuram Rajan, who was often considered to be impervious to the government’s concerns.

Indeed, a change in the monetary stance under Patel from accommodative to neutral— meaning that it sees the current economic situation to be less conducive for a rate reduction than four months ago— is seen as a hardening of its conservative and risk-averse stance.

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