In a recent comment in The New York Times, Robert Schiller, an American economist, wrote about the dangers of group-think in institutions entrusted with key public policy. Schiller, who’s being justly credited with a degree of perspicacity about the subprime crisis (he had also issued an early warning on the dotcom bust of 2001), talked about group-think in the US Federal Reserve as it found itself incapable of institutionally admitting that the housing market was bubbling over. It is a good time to ask whether the Fed’s Indian counterpart, RBI, suffers from a similar debilitating group-think and if so, what the costs for India might be. There have been media reports that RBI’s governor
D Subbarao was ‘guided’ by the central bank’s ‘old guard’ into not cutting key rates in the October 24 policy review. There have also been reports that RBI’s subsequent action was prompted by government intervention. Group-think in RBI seems to be centred around the proposition that India was and remains inflation prone and that monetary easing now will undo the ‘good work’ of conservative policy. The dangerous thing about this, to paraphrase Keynes, is that RBI’s policy staff are not letting their minds change even though facts have changed. Post-crisis, plenty of people—especially efficient market/minimal government advocates—are abandoning group-think and looking for heterodox solutions. RBI may have had ‘facts’ to support its monetary hardline thesis earlier—even this is debatable, however; this newspaper contested it—but clearly there’s evidence now requiring a change of stance. It seems though that just as the US Fed in the months before the crisis was hooked on to the idea of never-faltering financial markets, RBI in the weeks after the crisis can’t let go of the overheated economy idea.
How might this change? Many of RBI’s policy staff are employees who have spent decades in the institution and are, therefore, particularly vulnerable to group-think. It won’t be easy for governor Subbarao to change that, especially since he doesn’t have ‘outsider’ deputies who will help the boss ram through reform. The lobby against RBI reform is RBI. What’s the lobby for RBI reform? Maybe the way to go is to reduce RBI’s powers—take debt management and bank regulation away, as committees have rightly suggested. But will an RBI with the just core function of monetary management be more hospitable to occasional unconventional wisdom? There’s no guarantee.