The ball is in the Government’s court

One of the better aspects of policymaking in India is the fixed periodicity of monetary policy announcements. No other policymaking unit functions with this assured regularity, barring the finance ministry.

So, the RBI’s bi-monthly policy statement yesterday was along expected lines. But it was heartening to note that the Central bank stuck to its knitting with unswerving punctuality, despite the change in government. Monetary policy, however, has to wait for cues from public policy; the Budget may point to major policy changes if the Modi government and Arun Jaitley are eager to show their paces and their commitment to the kind of change their victory presages.

The RBI has played safe. It has reduced the statutory liquidity ratio (SLR) 50 basis points; not a very significant cut, certainly not the “slash” some media called it, more of a modest statement of intentions. As of now, it has to plough the lonely furrow of inflation control.

This is all the more necessary in a country like India where for some strange reason inflation control seems to have shifted to a remote corner on the policy radar. It has almost vanished from the list of concerns of the organised middle-class elites who do not seem to think the current rates of inflation are anything to feel worried about. India’s middle-class seems to have become anaesthetised to rising prices.

The old debate between growth and price control has shifted in favour of growth and nowhere was this more evident than in the latter part of the UPA-II’s term.

The RBI under the former governor D Subbarao had stuck to its guns of a tight money policy in the face of increasing irritability from North Block about its resistance to growth.

Among the industrial elites, the attitude towards the Central bank’s insistence on not lowering rates had ranged from weary resignation to constant complaints about high interest costs.

For Raghuram Rajan, the balance between inflation and growth is more nuanced than for his predecessors who placed their bets on price stability.

In a speech at the Bancon conference in Mumbai in November 2013, Rajan erected five pillars of RBI policy. The first was of a monetary framework that had to balance the burden of inflation — occasioned not just by supply constraints but by demand pressures — with the impulses of a weak economy in which demand reduction could affect investment and supply.

As he had said then, “This is a balancing act which requires the RBI to act firmly so that the economy is disinflating even while allowing the weak economy more time than one would normally for it to reach a comfortable level of inflation.”

But success here depends as much on New Delhi’s initiatives to augment not just supply but also investments, so that the malign effects of disinflation are mitigated.

From the safe and cautious path that the bi-monthly policy statement treads, it is clear that the Central bank is waiting for those initiatives from Delhi to set into motion more easy monetary policies.

The statement also makes clear that the Indian economy’s bounce-back depends a lot on the global atmosphere.

This is a timely reminder to those who think an individual’s messianic zeal for development can work wonders in an economy enmeshed into the global one.

The trajectory of the global economy’s path, in particular the fortunes of the US and EU, therefore, matters more than we would like to admit.

It would be appropriate to remember that the years of high growth were also those of robust global growth — till events in 2008 and subsequently brought the edifice down. The RBI sees some growth traction in the US and UK, but not in the EU. And till that happens, India’s leading export sector, IT, will flounder; in the meantime, competing developing countries such as the Philippines are muzzling in, and that can spell some fierce competition for an industry that had become complacent about its well-deserved reputation in the global IT space.

The RBI admits to sluggishness in the domestic economy and expects growth to pick up in the coming quarters, perhaps from September on. In the meantime, in a generous giveaway it has enhanced the limit of outward remittances under the Liberalised Remittance Scheme to $125,000 in view of “the recent stability in the foreign exchange market” with just a few end-use restrictions.

The RBI has taken a bold step forward even if gingerly; the first under the new regime that acknowledges the pent-up urges of the organised economy. The reduction in the SLR is to allow banks more elbow room to lend an anticipated pick-up in investment demand. “However, the Reserve Bank is also cognisant of the significant on-going financing needs of the Government” — a thought that tempers its hand to just a 50 basis point increase in liquidity for the private sector.

And the Central bank makes it clear that any further change will of course depend on the fiscal consolidation that the new Government can achieve.

In its first policy statement after the new regime has taken charge, the RBI has perhaps tried to tune into the new regime’s music and yet kept its distance by making a few points clear: first, that the success of monetary policy depends on the ability of public policy to affect supply changes, that its ability to release funds calls for fiscal consolidation and that the fortunes of the domestic economy depend a great deal on the global economy.

It is the interweave of these factors that will determine the RBI’s future moves both with regard to inflation and growth.