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05-04-2022
Bureau Report + Agencies
NEW DELHI: A year after the government led by Narendra Modi’s BJP came to power in 2014, the top finance ministry official accused the Reserve Bank of India of setting interest rates to benefit developed countries and sought a probe into its conduct, a trove of official documents obtained by The Reporters’ Collective reveals.
Finance secretary Rajiv Mehrishi, working under the then-finance minister, the late Arun Jaitley, made the claim after the RBI opted to priorities controlling rising prices over lowering interest rates, which would have made borrowing cheaper for businesses and citizens.
Although the government and the RBI having different views is not unusual, the revelations mark the first time a top government official has accused the RBI of working to benefit “the white man” in “developed countries” and sought an investigation into the “real purpose” behind the central bank’s decisions.
The documents, which were accessed by The Reporters’ Collective (TRC) under the Right to Information Act, are being made public for the first time as part of a three-part investigative series.
At the time in 2015, the RBI governor was Raghuram Rajan, an appointee of the previous, Congress-led government. The BJP government chose Urjit Patel as Rajan’s successor but the RBI didn’t cut the interest as sharply as the government wanted, even under Patel. So the finance ministry called a meeting with the bank’s newly set up monetary policy committee (MPC) to push it to cut interest rates, according to the documents. The unprecedented meeting fell through when committee members declined to attend, a development widely reported in 2017.
The attempt to influence the central bank came despite the Modi government having amended the Reserve Bank of India Act in 2016 to strengthen the firewall between the RBI’s primary function of controlling prices and the government’s political impulse to spur growth even at the cost of rising inflation.
The RBI’s then-governor Patel pushed back, wrote to the government saying it should stop trying to influence the RBI in order to preserve the “integrity and credibility” of the new monetary framework “in the public eye and our parliament”. Otherwise, the government would be in violation of the letter and spirit of the law that protected the RBI’s independence.
As disagreements piled up on this and other issues, Patel resigned on December 10, 2018, citing “personal reasons”. The government replaced him with Shaktikanta Das who, as a top finance ministry bureaucrat, had justified increasing the government’s influence in the RBI’s rate-setting function, official documents reveal.
Different roles
One of the RBI’s key roles is to control the amount of money and credit available in the economy through the interest rate at which it lends to banks, this is the central bank’s monetary policy function. Lower interest rates spur economic growth in the short term but can also lead to an increase in the prices of goods and services, or inflation. Untamed inflation erodes the value of money in the hands of citizens, particularly the poor, acting like a hidden tax that hits poorer and lower-income citizens more than the rich.
Monetary policy is typically kept independent of government control because politicians face the temptation to create more money and spend beyond their means on populist schemes and vanity projects. In the long run, excess spending by the government harms the economy.
Differing analyses of where inflation may be headed and how interest rates should be set often create tension between central banks and governments in many parts of the world, including India but in New Delhi, the debate took an ugly turn when the Modi government came to power in May 2014 as India was witnessing one of the highest levels of inflation in the world.
