Govt, RBI together in revamping central bank: Jaitley

Finance minister Arun Jaitley on Sunday played down reports about any alleged rifts between the finance ministry and the Reserve Bank of India, stating that the government and the central bank were having "free and frank" discussions as the government carries out a major overhaul of the financial sector.

In his post-Budget meeting with the board of governors of the RBI, the finance minister discussed the budget proposals for 2015-16 and had interactions with them on various issues.

Addressing the press after the meeting, Jaitley dismissed talks of any differences with the central bank as it undergoes a major overhaul.

"There is no question of any disconnect," Jaitley said, adding that along with RBI governor Raghuram Rajan he has initiated major changes in the 80-year-old central bank.

Jaitley said there was a need for clear distinction of regulatory roles, removing overlaps and this process is on.

As part of the initiative, the government and the RBI, early this month, agreed on a formal inflation target and are now in talks to finalise a structure for a rate committee similar to the US Federal Reserve Open markets Committee or the board of the Bank of England.

From March 2017, the central bank will target an inflation of 4 per cent, plus or minus 2 percentage points.

Talks are on to separate debt and monetary management, Jaitley said, adding that the government and the central bank are also debating the structure of a monetary policy committee that would replace the current system of setting the rates once the RBI Act of 1934 is amended.

The finance ministry has proposed an eight-member committee, headed by the RBI governor and including one government nominee with no voting rights.

The RBI, however, favours a five-member panel, comprising the governor, his deputy and two external experts picked up by them along with the Reserve Bank official handling monetary policy.

"All issues which concern both the institutions are regularly discussed," Jaitley said at a joint press conference with Rajan.

Jaitley, meanwhile, said he expected banks to pass on the benefit of a 0.50 per cent reduction in RBI's policy rates effected between January and March this year.

"We do not put pressure on them. We only expect and our expectations come true," said the finance minister, adding that only a few banks have so far lowered lending rates.

Some of the banks, he said, are waiting for RBI to ease rates further in its monetary policy review due on 7 April before passing on the benefits to borrowers.

RBI governor Rajan, however, said any future rate cuts would depend on the domestic price situation and partly on global factors, especially the hike in rates by the Federal Reserve.

"While the external environment is a constraint, a lot of what we need to do has to do with the internal environment," he said, adding that the Federal Reserve might take a little longer to raise interest rates.

While the Fed desisted from a rate hike in last week's monetary policy announcement, it had said it would not wait indefinitely on rate policy, signalling a possible mid-year increase.

Any hike in US interest rates would hurt emerging markets as it could trigger an outflow of funds from capital markets.