Wednesday, August 6, 2014

Between lines

Thought for the day
Reform is not pleasant, but grievous; no person can reform themselves without suffering and hard work, how much less a nation.”
-          Thomas Carlyle (Scottish, 1795-1881)
Word for the day
Lambent (adj)
Dealing lightly and gracefully with a subject; brilliantly playful:
(Source: Dictionary.com)
Teaser for the day
Why should there be an age limit for joining civil services?
Would it not be useful if people with 10-15years of work experience join civil services?

Between lines

The RBI governor obliged the consensus on Tuesday by keeping the policy stance on expected lines. From that viewpoint there is little to comment on the policy stance. In fact in the press briefing post policy announcement, the governor sought to impress the media that it is his conscious effort to make the policy path as predictable as possible.
However, refusing to be drawn into the intended boredom over this periodic ritual, I read a lot in between the lines in the four page policy statement.
First of all, a between the lines reading gives me an impression that the governor is not quite comfortable with the movement in the financial markets in past few months.
He attributed a large part of the buoyancy in financial markets to a global trend with its root in the "assurances of continuing monetary policy support in industrial countries". The emphasis on the vulnerability of financial markets to "changes in investor risk appetite driven by any reassessment of the future path of US monetary policy or possible escalation of geopolitical tensions" and the consequent discomfort is rather conspicuous to me.
Secondly, the governor sought to convey the thought that while the inflation has shown some moderation since June policy statement, the monetary policy would have played little role in this moderation. Most of this could be due higher base effect and lower global commodity prices.
He also highlighted that the government, through reform in administrative price mechanism (APM), could be a significant contributor to inflation in coming quarters. Therefore, "the upside risks to the target of ensuring CPI inflation at or below 8 per cent by January 2015 remain". Accordingly, the statement reads, "The balance of risks around the medium-term inflation path, and especially the target of 6 per cent by January 2016, are still to the upside, warranting a heightened state of policy preparedness to contain these risks if they materialise".
Thirdly, and most importantly, RBI's assessment about growth pick up sounds circumspect. The policy statement implies that better export demand is supporting manufacturing and service sector activity. The current easy liquidity conditions and slack credit demand implies that the current estimate of 5.5% growth (5-6% range) could be sustained only if (a) external demand picks up; (b) the environment becomes and remains conducive to the revival of investment and unlocking of stalled projects (c) fiscal consolidation releases resources for private enterprise.
RBI thus appears captive at the hands of central bankers in the developing economies, especially US Federal Reserve, the political establishment's commitment to fiscal consolidation and private sector's ability to effect necessary improvements in their balance sheets to become creditworthy again.
With so many constraints and dependencies, no wonder the only thing RBI has to sell is predictability of policy direction (boring!) and thus taking the attention away from it!

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