There is an old legend. From time to time, numerous versions of this legend have been narrated by wise people to highlight the adverse effects of not admitting the mistakes early enough; indecision; and failure to assess the gravity of an adverse situation. One version of the legend goes like this—
Once a thief was caught stealing a sack of
onions from a farmer’s house, and was produced before the magistrate. On
asking, the thief first pleaded “not guilty”. After a trial the magistrate
found him guilty of stealing and allowed him to choose his punishment from the
following three options – (i) Pay five gold coins to the farmer; (ii) eat
hundred onions from the sack he tried to steal; or (iii) get whiplashed hundred
times.
The thief chose to eat the hundred onions,
without giving it a thought, assuming it to be the easiest one. However, after
eating just twenty five onions, he was in tears. His stomach started to burn
and refused to take anymore. He begged the magistrate to change his punishment
to a hundred whiplashes. The magistrate allowed his request and ordered his men
to whiplash the thief a hundred times. After taking twenty five lashes his skin
started to come off and pain started to become unbearable. He again implored
the magistrate to stop his men and allow him to eat onions. The magistrate
agreed to his request. He ate another twenty five onions and could see the grim
reapers (Yumdoot) standing right in front of his eyes. He now pleaded to the
magistrate to allow him to pay five gold coins. Had you stopped for a couple of
minutes to think about the options presented to you, you would not have
suffered so much the magistrate chided him, agreeing to his request.
The moral of the story is that if the thief had
admitted his mistake early, the magistrate could have let him off with a milder
sentence. He chose a sentence which he had no clue about, rather than opting
for the clearly defined monetary fine. Also, despite suffering once, he still
did not opt for the right option and suffered an avoidable twenty five lashes
and twenty five more onions.
The situation of the Reserve Bank of India
(RBI) is somewhat similar to the thief in the legend. It refuses to admit that
it has been confused between growth and inflation for long. It also refuses to
accept that in the present situation the factors driving the inflation are
mostly beyond its control; and it can only manage a small part of the inflation
by hurting the growth significantly and imperiling the financial stability!
Palpably, the out of turn rate hike by RBI is
aimed to protect the INR. The fear of the larger outflows, as other central
bankers hike rates aggressively, appears to have prompted the RBI to make a
preemptive hike. The currency market though does not appear impressed by the
RBI move, and INR has weakened to its lowest level ever. The outflows have
continued in the equity as well as debt market, despite higher yields (bonds)
and lower valuations (equity). The RBI might thus have wasted one important
arrow (40bps rate hike) in its quiver.
The situation is vividly reminiscent of the
current account crisis of 2012-2013. The INR witnessed violent volatility and
outflows were strong in light of taper tantrums. The rate hikes at that time
did not help much and we were very close to a balance of payment crisis. The
RBI changed its approach in September 2014 and an imminent disaster was
averted, but not without some serious damage to the financial stability and
growth ecosystem.
I assume this time we will not be driven to the
brink like 2013, and the crisis will be mitigated soon. For now we are eating
onions only. I hope the economy will be spared whiplash and gold coins.
