Don’t expect RBI, other central banks to mimic Fed rate cut, says Landau

India has one of the most respected central banks in the world. I had the privilege to work with colleagues from India. They are extremely professional and innovative. Despite being exposed to more natural shocks, more weather shocks and more climate shocks than many other economies, India’s inflation performance have been satisfactory. Overall, both in terms of the policy framework and in terms of the regulation of the financial sector, the central bank (RBI) is performing very well.

As a principle, market analysts tend to see the central banks reacting to each other. But that’s not what they do. They look at their own domestic situation. They look at the prospect for inflation, on growth, depending on their mandate from a domestic perspective. Of course, they internalise what other central banks are doing. But that’s only one element in that judgment. The fact that the central bank of the largest economy (Federal Reserve of the US) is doing something is a factor, but it should not be a determinant in any kind of decision. I don’t expect any central bank, especially the central bank of India, to try to mimic or imitate such a move by itself. There may be good reason to move interest rate in India. But the Fed’s recent move is just one factor in the decision.

The answer to this question has three dimensions The first is that central banks including India, have managed very well the two previous shocks — Covid, the war in Ukraine and its consequences on commodity markets. Inflation has been brought back very close to targets without recession. It is not mentioned enough that it is unprecedented in the last 40 years that inflation has been brought down to this extent with no recession. The last mile, as they say, is the most problematic because you get to the point where it’s very hard to calibrate the policy response. As regards the recent geopolitical tensions, we don’t know how the situation will evolve, trigger further shock on commodity and food prices.

I think everybody is basically broadly on the same page that there is some room for more accommodation, while still being restrictive. You have to distinguish between the direction and the level. So, the direction is ‘down’, but the level, still stays above maybe ‘neutral’ for some time. That was the general feeling, prior to the geopolitical shocks. They’re all going to go down, but they’re going to go down making sure that they don’t get to the neutral level too fast and too close in the short run.

Something very very important happened to the crypto market sometime back as they were acknowledged asset class by itself when the SEC allowed for ETFs in cryptos. That’s a major challenge. Whether it’s a good thing or not, I’m not sure. I think crypto is a very interesting concept, full of innovation. They have already triggered a lot of changes in the financial systems. Whether there should be an investment class open to the general public, I’m not sure and my understanding is that the SEC has fought very hard and actually was divided on the decision to allow them as an investment class. In my view, we should have them going and innovating. We should have them trying to find new ways. This is more like a sort of experimental field for innovation, rather than something which should be open to the general public.

This being said, the general mood about digitalisation of money and finance is that is the future. The switch to digital technology to improve payments and to improve money, that’s absolutely irresistible. Crypto is a part of it and it has triggered a lot of reflection about it. India, with its UPI system, is showing the way to the world in this regard. It’s going to be a very interesting decade in terms of moving to systems of payments, which would be more accessible to the general public, smoother to act and which will force the banking system for a dramatic reassessment of their role.