Business | Markets
Search for coherent policy in India
In this age of mass media fuelled investment decisions, perception of commitment is just as important as commitment
- By Keerthik Sasidharan, Special to Gulf News
- Published: 00:00 June 9, 2011
In the hurly-burly of policymaking, there are many ways of tackling a problem. It is thus important to have a clear vision of what particular roles certain institutions must play and what problems they must solve. Failure to have a clear institutional vision is just as detrimental as the inability to execute a plan. Nowhere is this lack of clarity and intellectual incoherence seen than in the statements by the Reserve Bank of India and their response to inflation over the past month.
On May 3, RBI governor Duvvuri Subbarao released a statement that made all the right noises about inflation. He reiterated a faith in contractionary monetary policy: credit reserve ratio had been raised by 100 basis points; the repo rate by 200 basis points and reverse repo rates by 250 basis points. To his credit, Subbarao's statement has gently deflected off the well-worn path of false tradeoff between inflation and growth. As the economist Ila Patnaik rightly points out, volatile inflation can result in diminished growth in the medium to long-term.
Yet, the RBI remained shy of committing itself as an inflation targeter as many central banks have done over the past two decades. So much so that the RBI has often conveniently used indices like WPI (wholesale price index) rather than CPI (consumer price index) as proxies for generic price levels. These may seem like minor quibbles. But in an environment where inflation has impoverished millions of households over the past two years, the RBI owes investors and households a clear commitment on how it hopes to tackle inflation and how its institutional commitments are formed.
In a remarkable turnaround, on May 9, Subbarao announced that the RBI had a potpourri of agenda — and more importantly, that inflation targeting by monetary policy was "unrealistic". In short, the monetary authority of India seems to believe that it can do nothing about inflation, because inflation is purportedly due to supply shocks alone.
Baffling stance
The RBI has avoided responsibility for the runaway inflationary pressures. It is quite baffling that the governor of India's central bank seems to convey that high and unstable inflationary expectations are in sync with development agenda. More importantly, the RBI reveals it is neither a hawk nor a dove on inflation. Perhaps just an owl of international finance who is happier regulating institutions and managing banks rather than aggressively create inflationary expectations in the market.
This view of monetary economics, as a twin of development economics, is reminiscent of the early days of industrial planning which led to nationalised steel plants across India in the 1950s. While environmental degradation and retardation of private sector were the consequence, the principal side-effect was the creation of a protected class of entrepreneurs who flourished under a patrimonial state. The RBI's policy of condoning inflation, in so far as it creates employment, and unwillingness to communicate an hawkish anti-inflationary view to the markets seems similarly misguided. It is likely to fuel an asset bubble, hurt the very poor and allow Indian firms to borrow and invest under conditions that don't reflect their financial strength.
In this age of mass media fuelled investment decisions, perception of commitment is just as important as commitment. The RBI has successfully erased any perception that it is an inflation-fighting central bank. A policy that attempts to please all will eventually please none.
The columnist works for a major European investment bank in New York City. All opinions are personal and don't reflect any institutional perspectives.
More from Markets
More from Business
Business Editor's choice
-
China breaks West's solar monopoly
Some countries in the world, especially Germany and the United States, have made considerable efforts to invest in developing solar energy cells
-
Burberry store spree will cut profit
Trenchcoat maker forges ahead with investment strategy targeting emerging markets
-
Laws needed to spur region bond markets
UAE Central Bank calls for creation of a centralised Sharia board to facilitate the sale of sukuk
