Wednesday, April 11, 2018

Driven by guilt, not conviction

"The mind that is wise mourns less for what age takes away; than what it leaves behind."
—William Wordsworth (English, 1770-1850)
Word for the day
Balladmonger (n)
An inferior poet.
Malice towards none
No matter what, one thing is certain - all politicians sincerely believe that they can fool most of the people all the time.
The entire social media campaign of theirs' is predicated on this belief.
First random thought this morning
ViMa, NiMo, MeCh et. al. appear to have made at least one section of Indians happy and competitive.
The staff of revenue authorities, enforcement agencies and affected banks are ferociously competing with each other to get an opportunity to travel abroad to pursue investigation and recovery efforts.
Nepotism, favoritism and opportunism are being demonstrated at their best level.

Driven by guilt, not conviction

In an ideal situation the monetary policy of an economy is set keeping in view the following broad objectives:
(i)         Neutrality of money
(ii)        Stability of exchange rates
(iii)       Price stability
(iv)       Full Employment
(v)        Economic Growth
(vi)       Equilibrium in the Balance of Payments.
However, in practice the objective of monetary policy may varys from country to country and from time to time.
Prior to setting up of Monetary Policy Committee in 2016, RBI used to follow a multiple indicator approach. Its policy decisions took into account a variety of factors into, viz., inflation, growth, employment, banking stability and the need for a stable exchange rate, etc.
The policy making was thus more of a balancing exercise rather than a directive. RBI would face intense pressures and lobbying from various quarters. For example, the Government would want lower rates; consumers would want benign inflation; businesses would want lower rates, whereas savers would lobby for high rates. Consequently, RBI usually ended up fire fighting and maintaining a balance to keep all stakeholders happy. In the process it frequently lost focus and ended up focusing on different indicators at different points in time.
The primary objective of setting up MPC has been to abandon this multiple indicator approach and make price stability (inflation targeting) the primary objective of setting monetary policy.
Now if we analyze the recent policy statements, discussions and decisions of MPC, it is almost impossible to ignore the strong urge shown by the committee members to transcend beyond the mandate and transgress into other areas and thus defeating the very objective of transformation of the monetary policy framework. From minutes of MPC, one gets a feeling that the body is suffering from guilt of not being able to support higher growth through better capacity utilization, poor asset quality of banks hampering credit growth, poor job creation by corporate sector etc.
For inflation targeting, it seems to be depending more on factor beyond its control like monsoon, global crude prices, trade disruptions through actions of various foreign governments, fiscal incentives (HRA, MSP, etc.) that are being or may be provided by the government; rather than efficacy of the policy tools available with. The fact is that it has chosen not to use policy rates to control inflation which was running beyond its target for 6months...to continue
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