The RBI Governor reacted angrily on being questioned on why he is breaking the convention, he was angry that it was adapted as a convention. If there is a convention which RBI Governor and MPC (Monetary Policy Committee) needs to challenge, it is the convention of incrementalism.
The frustration and anger that the Governor expressed is also because every twitch of his is analysed. Every alphabet and comma in the policy statement is questioned. When every move is tracked, small dalliance from past are pounced upon by commentators viciously sliced and diced. It makes one defensive about changes as things seems to be out of control. But it's not the change, it's the lack of pace that is bothersome. A incremental change as an institutional approach is serious issue. Now compare the anger of businessman, employees who feel that their businesses and jobs are going away due to circumstances beyond their control.
If the same problem has to be solved, every quarter by making another small change it shows a fearful mindset. It shows a mindset afraid of taking a bold step. A mindset mired in tradition of gradual shifts, postponing the ultimate. This is Central bankers' approach to solving a problem bit by bit. Not roil the market, prepare it for the change before making it. A sudden step can lead to a rout in currency which may affect confidence in the market and impact even the stock market. A sharp turnabout can crush the bond market raising bond prices. Foreign investors, credit rating agencies may get startled with the risk as they anticipate that the central bank is always hiding more than it is revealing. A central banker cannot be alarmist, it's not his job to create turbulence in markets. Even if there is a fire, he has to make it appear that its not going to burn anything. He cannot provide oxygen by his utterances or action.
Hence, incrementalism as an approach comes naturally to a central banker, there are no sudden moves that the market cannot anticipate and predict. Incrementalism is identified with conservatism and worn as a badge of honour. Hence, even after retirement it is difficult for Central bankers to shed it as this article
The incrementalists are also perfectionists they know the problem too well they have discussed it threadbare. They do know that India is the only large economy with positive interest rates in the world. Take a look at this data sheet comparing real interest rates
The RBI is not ready but the market is awaiting this. There is another thing that the RBI is not preparing the market. That is the pace of slowdown. Auto numbers have been falling since April 2019, June saw the biggest fall in 18 years. The largest company Maruti Suzuki saw the biggest dip in July
The same thing is happening in services and BPO sector. Here the shift and the change is even more difficult for to capture as they do not borrow from banks. There is little or no debt on their balance sheet, no distress in revenues or profit, but they have started shedding people. Overall employment is coming down in the largest job engine of the country, due to automation
The GDP growth is slipping, but RBI wants to acknowledge it 10 bps at a time. To do so in any other manner will create panic. Indian savers who have been brought up on a healthy rate of interest would panic if the rate are cut rapidly, Though the saving rates in the country is at a historic 20 year low
The shifts maybe gradual and generational in nature, but there are others the structural shifts which are not being noticed due to the fact that they are happening too fast.
The incremental approach of let's do a 35 basis points cut wait, than wait for another quarter to do next cut. Wait for several quarters for it to transmit. Wait for more expression of pain for it to flow to the MSME sector. Wait and watch if an NBFC is about to collapse, but don't interfere.
Its interesting that this approach is not considered wrong. If you go back to the archives of 2008 and see the discussion that were happening in Federal Board of Governor meetings in the US. They were slow to understand the full impact of the calamity facing them even two days after Lehman Brother went down. The Fed's meeting discussed and kept the rate at 2 per cent.
The RBI is candid about the problem in NBFCs so that the markets knows but it has not done anything about it. NBFCs growth happened in the shadows of a frozen banking sector. NBFCs funded companies that banks would not lend, mutual funds subscribed to bonds that NBFCs would not subscribe. Now they are both collapsing on each other faster than you can say fraud, or contagion.
Almost every sector is slipping and sliding away as credit squeeze, regulatory overreach and technology disruption is affecting them. This is not something that the RBI is unaware it's overflowing with internal advice, is being pushed by the Minister of Finance and even external analyst. The RBI is stuck with taking baby steps so who will take the leap to solve the whole problem in one stroke.
Developed countries have built their economy
The time to react is rapidly shrinking the time to act is now.
(K. Yatish Rajawat is a policy analyst and journalist. He tweets @yatishrajawat)
( With inputs from IANS )