The Great Recession which set in in 2007-08 claimed several victims on its way. Global banks considered “too-big-to-fall” looked meek. There were the fanciful products (derivatives in varied forms) which were smokescreens to cover “risk.” Rating agencies lost their reputation.
The most pitiable victims were the central banks of advanced countries such as the U.S. Fed, ECB and the BOE which were entrusted with monetary policies. They were firm in their view that all that was required was to fine-tune the interest rates up or down, adjust the money/credit flows and the financial machine will take care of the rest, more like the clicks on computer boards. There was neglect of bank supervision which coincided with excessive financialisation across the globe. Even a week before the onset of the crisis, they believed that their financial markets had depth and would ‘correct’ soon. And now those central banks are battling against the crisis with “non-conventional” tools such as printing dollar notes, buying toxic assets and hoping the markets will recover.
Old polices have failed and there is a vibrant, new thinking on alternative approaches. There are the issues governing the links between fiscal and monetary policies. Dr. Y.V. Reddy, former Governor of the RBI, has devoted several lectures, articles and books on these issues. Many others like Andrew Sheng and Barry Eichengreen have come forward with their opinions. Monetary economics is not the same animal it was a decade ago.
It is truly a daunting task for any author to undertake a review of the “Conduct of Monetary Policy India” and its changing dimensions in the post-reform period. This is what the author of this book seeks to do.
Out of 10 chapters in this book, only two handle post-reform (rather post-crisis) issues. The chapter on monetary policy and inflation dynamics in India seeking to set the nub of the book is patchy and disjointed. It flits from one theoretical issue to another without due analysis or links with India. For instance, it makes contradictory statements on the validity of the Philips curve. It ends adding that inflation persistence in India is due to increasing openness which is contrary to cross-country experience . At the same breadth, he adds that the Philips curve has become flatter!
Chapter three provides a descriptive narration of the reforms in the financial sector. Much of it relies on the earlier Chakravarty Committee Report and the two Narasimham Committee Reports. It takes the official (RBI/Government) view that these have deepened the Indian financial system. There are those who feel that they only scratched the surface and did not create a vibrant private sector market in the financial sector. These include Dr. Raghuram Rajan and Dr. Urjit Patel who are now with the RBI!
The chapter on structural changes and macro-economic issues is badly arranged. At one level, it deals with the inadequacy of monetary policy to cure regional disparities and at another, with the need for greater monetisation such as banking penetration. Later, it moves on to “growing globalisation of the Indian economy.”
Referring to the problems of managing inflows, he draws attention to the “Impossible Trinity”, the term coined by Robert Mundell which the author, sadly, attributes to Jeffrey Frankel! While dealing with this, he cites Dr. Reddy and his choosing “intermediate solutions.” There is only one more place where he gives credit to Dr. Reddy, that is, while dealing with the RBI’s policy of adopting “multiple objectives.” Dealing with India’s monetary policy in recent years without reference to Dr. Reddy is like staging Hamlet without the Prince of Denmark!
There is a scrappy chapter which tries to describe Global Developments, post-crisis. The author fails to narrate the heroic attempts made by the RBI in bailouts without compromising its balance sheet. He also fails to deal with the criticism laid out by economists like Arvind Subramanian, Chief Economic Adviser, that India paid a heavy price in later years.
In describing the monetary policy framework and the operational procedures, the author draws heavily on his experience in the RBI and gives a good account. His analysis of the working of the Liquidity Adjustment Facility (LAF) is sound. However, he does not explain why, in recent years, it has met with heavy weather.
Central Bankers, other than those in advanced countries with deep financial markets and high degree of monetisation, feel that their tools become ineffective and are not being transmitted by the financial system. They spend lot of time and effort trying to find out why there is such poor transmission. They will not admit that the roots have to be traced to socio-cultural habits and they are not cured by reforms.
This book is ambitious. The author tries to bite more issues than he can chew. The chapters drawing on the author’s experience in the RBI and the government are sound. On the whole, the book has failed to rise to our expectations.
CONDUCT OF MONETARY POLICY IN INDIA: Amaresh Samantaraya; T.R. Publications, A-32, III Floor, Gulmohar Apartments, 35, South Boag Road, T. Nagar, Chennai-600017. Rs. 895.
