The appointment or reappointment of a Governor of RBI should normally be a dignified and silent affair, not an event analogous to the IPL. However, as everyone wants to be asked questions and everyone has an opinion, this issue has grabbed headlines, provoking a lot of conjecture on this decision.
The icing has been added by an eminent personality, who has, as Mark Antony would have said, set ‘Mischief … afoot’ with maverick-like statements, spooking the media as well as the markets. India Inc has been scandalised by such assertions and has pledged support for the incumbent Governor; if a restricted referendum is held today within corporate India, the vote in favour of a reappointment would be almost unanimous.
To add to this rather ‘undignified debate’, it can be said that the logical way of assessing the decision would be to establish if there is an argument for the assertion that has been put forward.
To begin with, it must be stated that there is a right to express an opinion, and issues of likes or dislikes can never be argued with logic because they are driven by emotion. However, if there are any factual inconsistencies in antecedents, there are processes in place that can address them. The points for discussion are two-fold. One, whether or not any incorrect decisions have been taken as has been asserted? Two, whether, as has been emoted by India Inc, the economy would be ruined if a change is considered?
The bone of contention has been interest rates and it is the decision taken to keep them at what has been considered an elevated level which has led to the partial destruction of the economy. Now, given that we do go around saying that ours is the best growing economy—which has been reiterated by the government as well as multilateral agencies—it means that the country has done very well and the conclusion can be refuted on factual grounds.
The issue of interest rates is intriguing. The action of RBI to keep interest rates elevated was purely a logical, theoretical and practical response to what had to be done, given the decision taken by the government. Let us see how this works. RBI had set up an independent committee on monetary policy to arrive at what should be done, and the Urjit Patel committee recommended targeting CPI. It could be argued that most of the CPI components cannot be affected by monetary policy, but aligning interest rates to CPI is correct in terms of protecting real interest rates and hence monetary policy becomes a reaction to inflation. The committee made a suggestion which was accepted by the central bank.
The government then had acquiesced and entered into an agreement with RBI, whereby inflation norms were specified and the central bank perforce would have to target this number. Once this was cast in stone, it means it was a government decision and RBI has to follow the same, which is what has been done. In fact, with CPI inflation remaining elevated at above 5%, one can actually argue saying that RBI has been too liberal with the monetary policy response by lowering rates! Besides, there is little evidence to prove from the past that industry borrows money because it is cheap (as has also been the case with quantitative easing—QE—in the West). The challenge for us is low demand which is reflected by the low average capacity utilisation rates of around 70-72%. Investing in these conditions is just not feasible.
Therefore, the ball is back in the government’s court, which can always change the goal post to GDP growth if the response has to be different—though it will raise conundrums as if we say growth is very high at 7.6% then there can be a weak case for lowering rates further. There is a case of judgement being used where RBI is in a better position to take a call given its apolitical nature. If it is felt that such calls can be taken by other authorities, we can then take a bold decision to remove the powers of interpretation from RBI and pass on the same to the relevant authority; this would be most improper.
The performance of RBI in the last three years or so has been quite remarkable in terms of what was set out to be achieved. The agenda included financial inclusion, new banks, financial markets reforms, Interest Rate Futures, internationalisation of rupee, NPA management, etc. While some of these ideas were already on the ‘to-do list’ of earlier Governors, the incumbent has ensured that all of them have been implemented with a very good modicum of success. Against this background, there is definitely a strong case for arguing for an extension, as the agenda can be taken to its logical end since any change in leadership can mean a new thought process with differing priorities. Also, it is felt that just like governments’ tenures, RBI too should have five years to bring about comprehensive reforms and build systems.
Will a change of guard bring the economy crashing down? This would be an illogical conclusion to draw as the institution is solid and has shown over the tenures of different Governors that it has maintained excellent surveillance systems and guided the economy through difficult times. While the forex swap introduced in 2013 at 3.5% appeared a master stroke, it must be remembered that this concept was preferred to a sovereign bond which the predecessor was thinking of. Even earlier in the 1990s a forex crisis engendered the famous Resurgent India Bonds and India Millennium Deposits in this century. Therefore, the view expressed by some experts that the forex market will crash resides in the nucleus of exaggeration.
At times, it does appear that simple issues are blown up as the scatter points on the graph are forcibly joined through seemingly logical equations. Personal micro views expressed have been pushed into the macro horizon, leading to imaginary Don Quixote-like battles to the extent that everyone believes these tales. The government and RBI have often had differences of opinion on each other’s turfs, but these ideological paradigms have never come in the way of the economy. All RBI Governors have been independent minded insofar as they have batted without political gloves.
Therefore, the conclusions that may be drawn are that RBI has done the right things and not destroyed the economy. Continuity in the realm will be helpful, though change will not be harmful. This could be the view of, what Harry Truman would call, two-handed economists.
The icing has been added by an eminent personality, who has, as Mark Antony would have said, set ‘Mischief … afoot’ with maverick-like statements, spooking the media as well as the markets. India Inc has been scandalised by such assertions and has pledged support for the incumbent Governor; if a restricted referendum is held today within corporate India, the vote in favour of a reappointment would be almost unanimous.
To add to this rather ‘undignified debate’, it can be said that the logical way of assessing the decision would be to establish if there is an argument for the assertion that has been put forward.
To begin with, it must be stated that there is a right to express an opinion, and issues of likes or dislikes can never be argued with logic because they are driven by emotion. However, if there are any factual inconsistencies in antecedents, there are processes in place that can address them. The points for discussion are two-fold. One, whether or not any incorrect decisions have been taken as has been asserted? Two, whether, as has been emoted by India Inc, the economy would be ruined if a change is considered?
The bone of contention has been interest rates and it is the decision taken to keep them at what has been considered an elevated level which has led to the partial destruction of the economy. Now, given that we do go around saying that ours is the best growing economy—which has been reiterated by the government as well as multilateral agencies—it means that the country has done very well and the conclusion can be refuted on factual grounds.
The issue of interest rates is intriguing. The action of RBI to keep interest rates elevated was purely a logical, theoretical and practical response to what had to be done, given the decision taken by the government. Let us see how this works. RBI had set up an independent committee on monetary policy to arrive at what should be done, and the Urjit Patel committee recommended targeting CPI. It could be argued that most of the CPI components cannot be affected by monetary policy, but aligning interest rates to CPI is correct in terms of protecting real interest rates and hence monetary policy becomes a reaction to inflation. The committee made a suggestion which was accepted by the central bank.
The government then had acquiesced and entered into an agreement with RBI, whereby inflation norms were specified and the central bank perforce would have to target this number. Once this was cast in stone, it means it was a government decision and RBI has to follow the same, which is what has been done. In fact, with CPI inflation remaining elevated at above 5%, one can actually argue saying that RBI has been too liberal with the monetary policy response by lowering rates! Besides, there is little evidence to prove from the past that industry borrows money because it is cheap (as has also been the case with quantitative easing—QE—in the West). The challenge for us is low demand which is reflected by the low average capacity utilisation rates of around 70-72%. Investing in these conditions is just not feasible.
Therefore, the ball is back in the government’s court, which can always change the goal post to GDP growth if the response has to be different—though it will raise conundrums as if we say growth is very high at 7.6% then there can be a weak case for lowering rates further. There is a case of judgement being used where RBI is in a better position to take a call given its apolitical nature. If it is felt that such calls can be taken by other authorities, we can then take a bold decision to remove the powers of interpretation from RBI and pass on the same to the relevant authority; this would be most improper.
The performance of RBI in the last three years or so has been quite remarkable in terms of what was set out to be achieved. The agenda included financial inclusion, new banks, financial markets reforms, Interest Rate Futures, internationalisation of rupee, NPA management, etc. While some of these ideas were already on the ‘to-do list’ of earlier Governors, the incumbent has ensured that all of them have been implemented with a very good modicum of success. Against this background, there is definitely a strong case for arguing for an extension, as the agenda can be taken to its logical end since any change in leadership can mean a new thought process with differing priorities. Also, it is felt that just like governments’ tenures, RBI too should have five years to bring about comprehensive reforms and build systems.
Will a change of guard bring the economy crashing down? This would be an illogical conclusion to draw as the institution is solid and has shown over the tenures of different Governors that it has maintained excellent surveillance systems and guided the economy through difficult times. While the forex swap introduced in 2013 at 3.5% appeared a master stroke, it must be remembered that this concept was preferred to a sovereign bond which the predecessor was thinking of. Even earlier in the 1990s a forex crisis engendered the famous Resurgent India Bonds and India Millennium Deposits in this century. Therefore, the view expressed by some experts that the forex market will crash resides in the nucleus of exaggeration.
At times, it does appear that simple issues are blown up as the scatter points on the graph are forcibly joined through seemingly logical equations. Personal micro views expressed have been pushed into the macro horizon, leading to imaginary Don Quixote-like battles to the extent that everyone believes these tales. The government and RBI have often had differences of opinion on each other’s turfs, but these ideological paradigms have never come in the way of the economy. All RBI Governors have been independent minded insofar as they have batted without political gloves.
Therefore, the conclusions that may be drawn are that RBI has done the right things and not destroyed the economy. Continuity in the realm will be helpful, though change will not be harmful. This could be the view of, what Harry Truman would call, two-handed economists.
No comments:
Post a Comment