Go on, Guv’nor, give us a quote

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The RBI governor is juggling three balls: the domestic interest rate, foreign exchange, and capital flow. And here’s the thing: you can’t hold more than two balls at once.

The new RBI Governor walked into his office and was greeted by a Ganesh pooja organised by the bank’s staff to commemorate Ganesh Chathurthi. After a short prayer, the Governor snagged a box of modhaks and decided to get down to business.

Clearing out some space on his overflowing desk, he called an informal meeting of his key staffers. “Welcome friends! Have some modhaks. Editorials say that policy continuity is the critical thing. But hey, we all know the truth, right? If continuity is what everyone wanted, I wouldn’t be here. So do tell me, now that I’m in the hotseat, which of these files I should take a hard look at, and which I can use for the bonfire on cold winter nights?”

^ Offering modhaks to Lord Ganesha removes obstacles, it is believed. Urjit Patel will hope to stock up on the sweet dumplings to help tackle the Impossible Trilemma he must negotiate as RBI Governor. | Wikipedia

The rate debate

Shah, an excitable young officer, was the first to pipe up. “Sir, you need to make up your mind on the monetary policy review on October 4. Are we going to cut the repo rate or stick to our guns? If we’re going in for rate cuts, we need to make them count. Banks, SMEs and exporters are not happy with the barely-there 25 and 50 basis-point cuts. The Commerce Ministry just hinted that a round number like 200 basis points would be really nice.”

“No. Absolutely not! What are you saying?” thundered Roy, an RBI veteran, his voice rising with emotion. “Compromise the independence of this storied institution, which has always stood up bravely to extraneous pressures? Did you not read >Dr. Subba Rao’s book? A central bank governor’s tenure is measured, not by his Facebook Likes, but by how ruthlessly he quells inflation. And aren’t you forgetting that the Governor is the architect of the famous report on inflation targeting? He has been profiled as an inflation hawk and what-not. How would it look if he suddenly turned into a tame dove?”

Ramaswamy, the IIT-IIM grad who had just joined up, was keen to catch the boss’s eye. “We need to be data-dependent, sir. And the data’s telling us to hold rates. The CPI (Consumer price index) print has been rising for four months and is at 6.07 per cent for July. That’s higher than our March 2017 target of 5 per cent and above the 2 to 6 per cent corridor that we’re targeting under the new Monetary Policy Framework. There are upside risks too from GST and the Pay Commission.”

“Hmmm, but why jump the gun?” countered the Governor, popping in a modhak. “Haven’t we just handed over this rate-decision thing to the MPC [monetary policy committee]? I am only one of RBI’s three members. Plus, there are three external representatives. The Centre’s agreed to an inflation target at 4 per cent. So let’s see what the Committee feels.”

Chakravarty, an old-time friend of the Guv, had a good laugh at this. “Hahaha! Nice joke. There’s good reason why that MPC was constituted with six members and not seven. The Committee will be split in the middle and you will have the casting vote. So, good luck!”

Swachh Bank Abhiyaan

An ex-banker added mournfully. “None of you inflation hawks think of public interest. If we don’t slash rates, how will PSU banks climb out of their hole? They need those extra margins to offset bad loan provisions. If PSU banks go bust, where will that leave the poor depositors?”

That had the Governor switching topics. “Talking of public interest, I have been told that bank lending to industry has come to a standstill. What’s the use of cutting rates, if banks are simply going to sit on their hands? What’s up with this bank loan clean-up?” he asked the Deputy Governor in charge of regulatory affairs.

“Yes, credit growth to industry was just 3 per cent in FY16. But until bankers recover their older dues from big corporates, they’re happy lending to the Indian Government; it won’t default;” was the reply. An assistant chipped in with details. “After the Asset Quality Review, where we sat with each bank and held a gun to their head to recognise all the NPAs, banks have taken big write-offs, sir. So the worst may be behind, but it’s not all over”.

“Well, I hope the Swachh Bank Abhiyaan is mostly over. Not only does it make me very unpopular with bank Chairpersons and liquor barons, I am quite allergic to dust,” quipped the Governor, eliciting polite laughs.

Rupee rescue

“But all this stuff will not even matter if the Rupee begins its Trapeze act once again,” said the gloomy representative from the Treasury, who had been quietly munching on modhaks. “After all the failed experiments with Quantitative Easing, experts are now making dire predictions about the world economy going to the dogs. If they get wind of this, Foreign Investors will pull out of India double-quick and scoot back to the U.S.”

A central bank must strike a balance between inflation expectations and growth impulses; manage the structural deficit in liquidity; and calibrate exchange rates in accordance with globally evolving rate differentials? Not easy.

“That would be terrible timing. Our banks owe the NRIs over $24 billion in FCNR(B) deposits that bailed us out in 2013; that’s due between now and November. Yes, we’ve built up $366 billion in forex reserves and bought forward dollars. But forex markets are crazy, so who knows?” commented the Governor.

“Ha! See! that’s another reason NOT to cut rates now. As long as India offers 7 per cent on its bonds, why will foreign investors sell? They’re getting negative rates elsewhere. We can bamboozle them to stay on,” said the crafty Roy.

Chakravarty added: “Yes, if we slash rates, foreign investors flee and the Rupee plummets, we’ll have mayhem in the markets. Achche Din will vanish! The government won’t like that!”

The Governor’s landline rang, interrupting this lively debate, as the Communications Chief put through a call from a top television channel ‘Just give them a couple of sound bytes about your vision, mission etc, Guv,” she said.

The room went silent as a young reporter demanded the Governor’s crisp comments on RBI’s likely policy on interest rates, liquidity, bond markets, the Rupee and bank NPAs, all rolled into one, over the next three years.

“On rates, the MPC will periodically re-calibrate policy so as to adhere to the flexible inflation-targeting framework set out in the Monetary Policy Agreement, while striking a balance between inflation expectations and growth impulses in the economy. On liquidity, the medium-term objective is to manage it in a manner that reduces the current structural deficit which is at around 1 percent of Net Demand and Time Liabilities. On the Rupee, we will be keeping our powder dry and closely monitoring market moves vis a vis Real Effective Exchange Rates, in light of the globally evolving rate differentials,” said the Governor, without pausing for breath. The reporter rang off.

“Errrmm… wasn’t that a bit technical for that young lady and her television viewers to follow?” asked Chakravarty.

That elicited an evil grin from the new Governor. “Well, I’ve realised that if I have to fulfil my mandate for three years and also keep everyone happy, my best bet is to make sure that no one understands what exactly the RBI is up to. All this transparent signalling of policy moves etc. is pure bunkum. There’s no way anyone can juggle interest rates, exchange rates and liquidity, while satisfying the Centre, bank lobby and corporate lobby — all at the same time.

“I’m also hoping that particular sound byte will keep my media interview and speech requests to a minimum for the next three years. That should keep me in everyone’s good books.”

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