RBI’s Flip Flop policy and Dr. Rajan’s bogey game continues..

Not sure what is going on at RBI. It should perhaps change its name to Random Bank of India (this will keep the acronym to RBI) given its recent nature of policy. Or a more suitable and perhaps preferrable Surprise Bank of India (this will require a change in both the name and acronym with latter clashing with the largest bank in the country). May be another committee can be floated to work on this..

Once again, against market expectations, RBI hiked policy rates. The bogey game continues but perhaps it is likely to be over as the statement suggested that no more rate hikes will be needed. But then the same was said in October review as well. Who knows? Just that markets have not really played a bogey so far…

Another thing is this confusion between RBI statement and Governor’s Press statement. Earlier, first version was longer and second was a shorter version for the press. Now both are nearly same. Why duplicate?

The blog supports revisiting the inflation stance but does not understand this idea of hiking rates for the sake of it. It has been way too random. Also read this piece for the confused policy at RBI which printed before the policy.

  • You  choose to pause on rates in Dec-13 when inflation touched record high saying you would wait for the noise to settle down. Though, how would it have mattered whether inflation was 11% (with shock) or 10% (without shock)! It was still much higher than threshold levels (now called as inflation target). This let yields to fall sharply.
  • The inflation data did come lower as veggie prices came down. So, this set market expectations that there will be an extended pause with some looking at rate cut as well. This let yields to fall sharply.
  • Then came the Patel Committee which led to expectations that perhaps there will be no rate decline atleast in near future. This led to correction of markets. But as this blog argued, there is nothing so new which Patel committee really added. What you call flexible inflation targeting now is nothing but multiple indicator approach. In both inflation is the primary goal but you shift policy based on at other risks as well. So not really an inflation nutter as Merv King said but a flexible one. I mean the moment you call yourself flexible, it can mean anything really. It is just like multiple..This let yields to harden.
  • Despite the correction, there was wide belief that RBI shall pause. It will take time for RBI to work on Patel Committee proposals.
  • But this did not happen. Some suggestions from Patel Comm seem to have already been implemented like Mon pol now would be a 2 monthly affair(more on this later).This perhaps needs to make it to the record book as suggestions of a committee have been accepted in one week flat!
  • Governor could have easily anticipated (perhaps knew much of it as what else will someone write??) what was coming in the report and should have stuck to hiking in Dec-13 too.
  • In Dec-13, RBI paused but sounded hawkish. Now, it has hiked and sounds dovish despite saying the inflation will remain higher than Patel Comm for most part of the year. It is expected to follow a so called glided path which is just another fancy way of saying inflation will decline in stages. But one is never sure.
  • The most important thing has been mockery of monetary transmission. Somewhere down the line RBI has missed the most important part of monetary policy – monetary transmission. What do banks do in such confused policy? Bond markets still move up and down immediately but banks take time. Before Dec-13 review. RBI was chiding banks for not hiking rates. And then came the Dec-13 review where RBI paused.
  • As a result, few banks actually lowered the home loan rate (marginally) till the next policy! And now in this policy RBI has again hiked rates suggesting that despite inflation remaining high, it is perhaps the end of the rate cycle. How can one be so sure? It will just take one supply shock to push CPI high and persistent at that. As CPI has higher weight, it is far more susceptible to these shocks.
  • So this entire tightening business has just been so comical really. Banks have not really hiked rates and with the recent statement will keep them on hold as well. Without monetary transmission where banks hike rates etc, how will you achieve lower inflation?
  • I mean even common sense will tell you if there are limited shocks, inflation (CPI/WPI) will move lower to a more accepted region. If you believe in this common sense inflation path, how does hiking rates by 25 bps help?

More points on changes/deletions/additions:

  • RBI will now meet 6 times an year from the 8 so far. This is welcome as it will mean 2 less surprises in an year!
  • But then there was a logic to why we had four quarterly reviews  and the four mid q reviews.
  • Four main policy reviews were announced on respective dates to take gauge of the developments in previous quarters. As quarters in a financial year ended on Jun, Sep, Dec and Mar, we had mon pol reviews at end of Jul, Oct, Jan and Apr. The idea was by then one had full understanding of how quarter fared as companies have different dates for their quarterly results and so on. Moreover, there is other macro data like GDP, CAD etc which comes quarterly.
  • Then we had mid q reviews between each main policy. This was because the crisis led to RBI intervening between policy leading to uncertainty in markets. So they shortened the gap between policy from 90 days to 45 days.
  • With 6 meetings now, we will have 1-Apr ( a bank holiday!), 1-Jun, 1-Aug, 1- Oct, 1-Dec and 1-Feb (the dates could change..).
  • This will mean the quarterly assessment of economy is also likely to go into RBI museum. It was anyways sent to the museum in this policy as by releasing it with policy no one will read it. In future, we might just have RBI policy statement and bi-annual inflation report as suggested by Patel Committee.
  • RBI has also done away with projection of monetary aggregates. This surely reduces the work of analysts but takes away the attention from what are seen as really valuable indicators after the crisis.
  • The policy statement seems to also getting shorter and does not mention any risks etc as earlier. Change is important but I think the earlier statement was useful as it was richer and made people read and understand things 8 times in an year. You keep removing things and least people will care. And then you will surprise them with some or the other move.

In the end, nothing really matters as policy mandarins decide on policy decisions. Whatever they think is right can be defended from the high apostles. If you do not wish for market expectations, why seek them? And then we have experts and media who have forgotten to ask important qs…

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