Chowkidar Reserve Bank
RBI’s job is to safeguard the economy till a new government is sworn in.
The Brits may have ruled us for 200-odd years and left us many legacies. But one legacy they did not leave behind is the British penchant for understatement. We are an excitable lot. And that, perhaps, explains the unmistakable, but palpable, sense of excitement over Reserve Bank of India’s (RBI) forthcoming monetary policy statement due later this week.
But that’s not the only reason. The April 4 statement is the first for FY2019-20, starting April 1. But, more importantly, it will have to be framed in an environment where, thanks to the model code of conduct, one of the two levers of macroeconomic policy — fiscal policy — is effectively AWOL. Consequently, monetary policy, long-accustomed to playing second fiddle to fiscal policy, will have to act as the first line of defence against any threat to economic growth and stability.
Remember, regardless of whether the central bank is independent or not, monetary policy is constrained by fiscal policy. More so in India, where RBI is responsible for more than just monetary policy. As GoI’s merchant banker, RBI is also responsible for raising and managing government debt.
Given the large and growing size of the fiscal deficit, this is an incredibly difficult job. It calls for balancing the dictates of monetary policy with the compulsions of ensuring GoI’s market borrowing goes through smoothly, with minimum disruption. And at the lowest possible rate of interest.
A lower interest rate on sovereign borrowing reduces GoI’s interest burden. Since sovereign interest rates set a floor for other borrowing, it also reduces interest rates in the economy. Hence the constant tussle between elected governments wanting lower rates of interest and central banks, unmoved by electoral compulsions.
That’s how it is when it’s business as-usual. But in the run-up to the general elections, it is not business-as usual. The model code of conduct means GoI’s hands are effectively tied, sometimes absurdly so. Take the recent instance of GoI seeking the Election Commission’s prior approval for what is a routine announcement: the borrowal calendar for the first half of the year. In such a situation, the onus is entirely on monetary policy to ensure growth is not adversely impacted.
In the charged political lexicon of today, RBI has to play chowkidar. It has to safeguard the economy till a democratically elected government is in place and both policy levers, fiscal and monetary, can operate.
Former RBI governor D Subbarao explained the complicated and nuanced relationship between elected governments and central banks in his last speech before demitting office in the 2013 Nani A Palkhivala Memorial Lecture. ‘Central banks,’ said Subbarao, ‘make macroeconomic policy that influences the everyday life of people; yet they are managed by unelected officials appointed by the government. Such an arrangement is deliberate,
based on the logic that an apolitical central bank, operating autonomously within a statutorily prescribed mandate and with a longer time perspective, is an effective counterpoise to a democratically elected government which typically operates with a political mandate within the time horizon of an electoral cycle.’
Devil’s Advocate Calling
What does this mean for the forthcoming policy statement? It means RBI must proceed with caution. With political parties making wilder and wilder promises, heedless of financial implications, RBI must throw some grist in the wheels of possible fiscal adventurism come June 2019, when the Budget is presented. At the same time, it must keep in mind signs of growing economic weakness, both national and global.
With real rates of interest at a record high of over 4%, monetary policy must support the faint green shoots of recovery. Oil prices are still soft, the US Fed has indicated it is more or less done with raising rates and, globally, central banks are easing. In such an environment, RBI cannot be an outlier. It must cut rates. But in view of political uncertainties, only by a modest 25 basis points. At the same time, it must back its move with liquidity measures so that transmission is effective.
Making sense of conflicting macro data is never easy. But RBI governor Shaktikanta Das could hark back to the words of former PM and former RBI governor Manmohan Singh. ‘Subbarao,’ Singh is reported to have said, ‘you are moving from long experience in the IAS to the Reserve Bank. In the Reserve Bank, one runs the risk of losing touch with the real world. With your mind-space fully taken up by issues like interest rates, liquidity traps and monetary policy transmission, it is easy to forget that monetary policy is also about reducing hunger and malnutrition, putting children in school, creating jobs, building roads and bridges.… Keep your ear close to the ground.’ As Shaktikanta Das, another career IAS officer, settles down in Mint Street, he would do well to remember that.
Jagte raho! The time-honoured cry of chowkidars, as they patrolled the streets of Delhi at night during my childhood, making me feel safe and secure, is sound advice for times when RBI is the sole keeper of our economy.
Courtesy: The Economic Times (National)
- Penchant (Noun): Meaning: a strong or habitual liking for something or tendency to do something (लगन, झुकाव)
Synonyms: Predilection, Fondness, Proclivity, Relish, Predisposition, Affinity
Antonyms: Antipathy, Distaste, Aversion, Indifference
Example: He has a penchant for painting.
- Palpable (Adjective): Meaning: plain to see or comprehend; able to be touched or felt. (स्पष्ट, स्पर्शनीय)
Synonyms: Perceptible, Perceivable, Discernible, Tangible, Evident
Antonyms: Indistinct, Obscure, Mysterious, Equivocal, Impalpable
Example: The tension among the audience was palpable.
- Forthcoming (Adjective): Meaning: planned for or about to happen in the near future. (आगामी); (of something required) ready when wanted (उपलब्ध)
Synonyms: Imminent, Impending, Approaching, Upcoming
Antonyms: Bygone, Antiquated, Departed
Example: Keep an eye on the forthcoming elections.
- Sovereign (Adjective): Meaning: possessing supreme or ultimate power; Greatest in status (सवश-श्रेष्ठ, अपार)
Synonyms: Supreme, Absolute, Boundless, Unrestricted, Monarchial
Antonyms: Subordinate, Inferior, Minor, Limited
Example: Love is a sovereign remedy for unhappiness.
- Tussle (Noun): Meaning: a vigorous struggle, typically in order to obtain or achieve something. (खीींचतान, सींघर्श)
Synonyms: Scuffle, Hassle, Skirmish, Fray, Contention
Antonyms: Harmony, Truce, Agreement
Example: I had a tussle to get the knife off him.
- Absurdly (Adverb): Meaning: in an absurd way; to a very surprising extent. (बेतुकेपन से)
Synonyms: Ridiculously, Irrationally, Inanely, Ludicrously
Antonyms: Sensibly, Reasonably, Thoughtfully
Example: It seemed an absurdly high sum to pay for a coat.
- Adversely (Adverb): Meaning: in a way that prevents success or development; in an adverse manner (प्रततकूलता से)
Synonyms: Contrarily, Antagonistically, Unfavorably, Harmfully
Antonyms: Favorably, Helpfully, Propitiously
Example: His health was adversely affected by the work stress.
- Demit (Verb): Meaning: resign from (an office or position). (छोड़ना, पदत्याग करना)
Synonyms: Abdicate, Renounce, Cede, Relinquish, Surrender, Waive
Antonyms: Retain, Maintain, Hold
Example: Arguments within his congregation led to his demitting his post.
- Deliberate (Adjective): Meaning: done consciously and intentionally (जानबूझकर, इच्छित)
Synonyms: Intentional, Willful, Premeditated, Volitional
Antonyms: Inadvertent, Accidental, Unwitting, Instinctive
Example: The push on him was quite deliberate.
- Heedless (Adjective): Meaning: showing a reckless lack of care or attention. (बेपरवाह, असावधान)
Synonyms: Oblivious, Unwary, Imprudent, Rash, Improvident, Lax
Antonyms: Cautious, Wary, Gingerly, Vigilant
Example: He is heedless of the consequences.