The initial reaction to the RBI policy review is that it is well calibrated to match the domestic and external circumstances of the country, although markets have taken a pessimistic view.

The RBI can take a benign view of the trends in the stock markets, considering that they affect hardly 2-3 per cent of the people, including investors in mutual funds, unlike in the US.

I remember Finance Minister Manmohan Singh saying in the early 1990s when the stock market was on a roller coaster, due to what was then the biggest scandal in government securities market, that he would not lose his sleep over it!

But the adverse reaction in the exchange market should be a matter of concern to the central bank. I feel the market will get over the initial shock of the repo rate hike.

The Governor announced that the swap window for the system had already started yielding results and the RBI had received a total of $1.4 billion through the two counters of FCNR(B) deposits and external borrowings of banks.

Welcome development

The review is remarkable more for what it does it not say than for what it says. Perhaps for the first time, there is no mention of the bank’s estimation of GDP growth rates, money supply, deposits, credit and inflation.

I think it is a welcome development. In the past, I used to add 100 to 150 basis points to the RBI estimates of some of them and arrived at figures close to the actuals later.

I have always felt that, except for GDP growth and inflation, the other forecasts need not be made public by the central bank but can be used for internal purposes.

I have not seen them in the monetary policy statements of the West.

Predictions, not forecasts

Many of the conflicting estimates floating in the market are based on the hunches of the forecasters. The RBI need not confuse policymakers, businessmen and others concerned with the estimates. For them to be taken seriously, there should be an underlying macro model, as they are conditional forecasts.

Having worked in the RBI with P. K. Pani, trained by Lawrence Klein, on the development of a macro model for the economy three decades ago, I know the tremendous challenges that the researcher has to face.

We found that while forecasts were reliable for the real sector, they were not so for the financial sector. I do not know how many forecasters have the technical expertise and trained staff to build such models.

I use the term ‘predictions’ like the astrological ones, not forecasts! One exception could be the office of the Prime Minister’s Economic Advisory Council.

I wish the RBI, the PMEAC and others put up their models on their Web sites for the benefit of researchers who can have a healthy discussion on the methodology.

As the Governor stated, the CRR daily maintenance requirement, now reduced marginally, has been made much of by the system.

The hike in repo rate to 7.5 per cent and cut in marginal standing facility rate to 9.5 per cent were justified by him on the grounds that the former was intended to lower inflationary expectations and the latter to ease the funding costs, which he termed as high. Thus, the objectives of both price stability and growth have been addressed.

This is tightrope walking or a case of trisangu swarg (neither here nor there), which has been a hallmark of policy making in India right from the beginning of the planning era. Could it end with the bank falling between two stools?

The increase in repo rate may perhaps be withdrawn after a few days along with a further 25 basis point reduction in MSF rate, considering the pressure on the money market and the heavy drawals at the RBI window.

Repo as policy rate

The Governor’s intention to make the repo rate as the policy rate is welcome, as too many rates could confuse not only the knowledgeable public but the policymakers themselves!

Funding costs could be reduced if the banks are willing to reduce the spreads that are high compared to international standards.

ATMs and other modes of electronic banking have reduced the footfalls at bank branches, lowering the staff strength. Do they reflect in the reduction in bank charges?

The Statutory Liquidity Ratio was not mentioned either in the press release or in the Governor’s press conference — probably an oversight. Obviously, there is no change in the ratio. However, it would have been appropriate to mention the continuance of ratio at the existing level, not only for the sake of pro forma, but also because the Governor had earlier indicated his preference for reducing the ratio.

There was no announcement of the next review for the quarter July-September 2013. Earlier, the management had announced it for October 29.

The US Fed meets on the 29th and the 30th of the month and its decisions will be known in India on the 31st.

Following the healthy practice introduced in the latest mid-quarter review, I believe the RBI may reschedule its full-fledged quarterly review with bankers on November 1. Can the economy expect some Diwali gift from the Fed and the RBI?

(The author is a Mumbai-based economic consultant.)

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