It's The RBI Governor Stupid!

The widening rift between the Finance Ministry and the RBI takes a heavy toll on the economy.

- PR Ramesh

"It’s complicated.” That’s probably how the Narendra Modi Government would describe its relationship with the High Priest of Mint Street, Raghuram Rajan, were it to be spelt out as a ‘status’ update on social media. That’s sort of putting it mildly, though. Two years down in office and one still to go, Rajan, ushered in by the Manmohan Singh Government at a time when India’s economy was in crisis back in September 2013, is becoming something of a bugbear to the Finance Ministry. Enough, indeed, for some of its senior officials to describe—in private—the relationship between the Reserve Bank of India (RBI) Governor and the tallest men in the Government as “verging on the dysfunctional”.

The perceptions of the two differ fundamentally on the state of the economy, primary macroeconomic risks, metrics to measure inflation and, of course, the solutions. And these differences are widening.

The RBI believes inflation to be the biggest risk, while the Ministry of Finance (MoF) argues the obverse, maintaining that India’s economy is actually at risk of deflation if corrective measures are not put in place rightaway. This is perhaps the first time such a sharp divergence has emerged between the RBI and the MoF on assessing the economy and chalking out how the challenges it faces are best tackled. The dissonance is confusing various stakeholders—particularly corporate India.