Tensions boiled between a central bank and Prime Minister Narendra Modi’s government as Asia’s third largest economy faces its weakest growth in two years and record low inflation. Six months after setting up an independent committee to oversee interest rates, the government is expressing frustration that RBI chose not to ease monetary policy.

The move to keep rates unchanged, amid a dissent within Monetary Policy Committee for the first time, followed reports the committee declined a meeting with government. “The meeting did not take place,” RBI Governor Urjit Patel told a media conference following the rates decision. “All the MPC members declined the request of the finance ministry for that meeting.”

Economic conditions warranted a substantial monetary easing, said, chief economic adviser, Arvind Subramanian just hours after the RBI kept its benchmark repurchase rate unchanged as expected at 6.25 percent.

Before the two-day RBI meet, Finance Minister Arun Jaitley said in a statement that growth and investment needed to improve and any finance minister under these circumstances “would like a rate cut”.

Gross domestic product expanded by 6.1 percent in the January to March quarter, the slowest in two years, amid the aftershocks of Prime Minister Modi’s decision to ban high-denomination notes in November in a bid to curtail corruption. For the whole year to March, the economy grew 7.1 percent, down from 8 percent in the previous year.

The RBI now expects headline inflation at 2 percent to 3.5 percent in the first half the fiscal year ending in March, down from a forecast of 4.5 percent in April. In the second half of the year, the bank sees inflation edging up to 3.5 percent to 4.5 percent, also lower than the 5 percent previous forecast. It also forecast lower growth.

The cut in inflation forecasts was cheered by investors. The yield on benchmark 6.79 percent notes due May 2027 dropped seven basis points to 6.57 percent, set for the biggest one-day decline in three weeks.

The RBI’s downbeat assessment for both growth and inflation comes at a time when credit growth is at its lowest in 25 years and the central bank is tackling a huge surplus of liquidity in the banking system and grappling with a pile of non-performing loans.

That is partly because the monsoon soon is progressing normally and is poised to boost rural incomes. That along with higher allowances for workers in the public sector is likely to bolster activity.

Source: Bloomberg