Tuesday, April 17, 2012

IGNORE THIS KIND OF NEWS WHICH CAME OUT IN THE ECONOMIC TIMES: WE NEED NOT PAY ATTENTION TO WHAT SOME IVORY TOWER SPECIALISTS (WHO PROBABLY CRAMMED AND RAMMED SOME ECONOMIC THEORIES DOWN THEIR THROATS) SAY. THE RBI HAS DONE A GREAT JOB AND WE NEED TO APPRECIATE THE EFFORTS OF BOTH THE FMO AND THE RBI GOVERNOR---THE REST CAN GO TO HELL AND TELL THEIR JOKES THERE....!! THESE JOKERS WILL GET EMPLOYED, IN THESE KINDS OF FINANCIAL DAILIES ONLY....!!
Central banks are not expected to play to the gallery. That is the job of politicians. All the more reason to question the Reserve Bank of India's (RBI) aggressive cut in policy rates when ground realities suggested a much more nuanced stance.
In the circumstances its shock therapy - a 50 basis points reduction in the repo rate at which banks borrow from the RBI - comes across as a gamble, unwarranted both by ground macroeconomic realities and ironically enough, by the Bank's own policy pronouncements!
The 50 basis points reduction in the repo rate took markets by surprise because it goes completely against the grain of central banking. Central banks are known to tread cautiously especially when the choice is between the distinct probability of re-igniting lurking inflationary pressures and the faint possibility of kick starting growth. Remember, growth is faltering because of policy paralysis and fiscal indiscipline; not because of high interest rates.
The Bank admits as much, saying "inflation remains sticky and above the tolerance level". Also that the "deviation of growth from its trend is modest while upside risks to inflation persist."

These considerations, it adds, inherently limit the space for further reduction in policy rates. Correction, Governor!

These factors - abundant global liquidity, sharp increase in private final consumption, rising oil prices without a corresponding pass-through to domestic prices, high current account deficit, government's fiscal profligacy - have already limited the space for reduction in policy rates. Consequently one could, at best, have argued for a nominal 25 basis points reduction in policy rates on the grounds that it might be worth taking a small gamble, given that growth has slowed down more than anticipated.

What we have instead, is a larger-than-warranted reduction.The only unhappy (?) explanation for its inexplicable act can be the Bank's reluctance to stand firm against government pressure.

The stance of monetary policy, says the Bank, "is intended to adjust policy rates to levels consistent with the current growth moderation, guard against risks of demand-led inflationary pressures re-emerging and provide more liquidity."

Well said! Except that the action that follows is not consistent with the objectives. The hope, quite clearly, is that an aggressive rate cut stabilise growth (around its current post-crisis lower trend growth, estimated at 7.3% for the current year) and contain risks of inflation and inflation expectations re-surging. Is that wishful thinking; a triumph of hope over experience!

Source: The Economic Times
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