RBI, heal thyself

Jan 31 2013, 03:35 IST
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SummaryThe signature of the present RBI is contradictions leading to bad policy. It needs to join forces with the finance ministry, and allow 2013 to be remembered as the second coming of the 1991 reforms

It was so easy to hide one’s follies just a few months ago. The former finance minister, and now president, Pranab Mukherjee, had made it so simple. With his ministry practising retrograde economics, the common explanation to all of India’s growth problems was “policy paralysis” at the Centre. To be sure, his policies were endorsed and perhaps even dictated by Sonia Gandhi’s National Advisory Council. The fact remains that India managed to have the most fiscally irresponsible policy under UPA 2: populism, high inflation, and sub-sub-normal growth.

A sad aspect of recent economic policy in India was that the practice of self-destructive populism at the finance ministry prior to September 2012 allowed the RBI, and other advisers and agents of the government, to practise sloppy analysis, and indulge in even sloppier policy recommendations. Worse, they could bathe themselves in contradictions and still not be held “accountable”. It was a win-win situation for most such advisers. If the policy worked, they could take the credit. If the policy did not work, they could point to policy paralysis, bad investor sentiment created by retrospective tax amendments, etc. In other words, there was plenty to point fingers at, and no role for any action besides the lazily obvious.

Since September 12, 2012, the fiscal policy has changed markedly for the better. Policy paralysis nightmare at the Centre is over. On Tuesday, the RBI reduced repo rates for the first time since April 2012, and did so by the minimum tradition allowed — 25 basis points. The relevant question is: did the Indian economic situation warrant a larger cut? An associated question: are the prospects for future interest rate cuts really as low as the RBI governor, D. Subbarao, indicated?

It has been mentioned several times before by me, and it is encouraging to note that other analysts have also picked up on this theme, that the signature of the present RBI is that it not only indulges in obfuscation (which is good for a central bank) but also bundles itself into contradictions, and the changing of policy goalposts, which is a real bad. And bad because it severely erodes the RBI’s credibility.

We have a new addition to the ever-increasing set of goalposts of the RBI. Apart from looking at domestic and international growth, food and core inflation, the eurozone and the US, the yen and currency wars, WPI and CPI and property inflation, pricing power

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