In an earlier article (“Bali Hai”, May 12, 2009), I thought I saw Dr Subbarao, the current RBI Governor, looking very debonair in what-looked-like Rip Curl surfer shorts and shades, about to take to the surf in Bali. I was a bit surprised because, in the few months since he had taken charge, he hadn’t struck me as a surfer, or particularly cool, for that matter.
Well, last week’s monetary policy statement changed all that.
His coolness is all the more remarkable since he took office on September 5 last year, just days before Lehman imploded and the current global conflagration began. It may only be coincidence, but this is the second time (that I remember) that a new RBI Governor has taken over in the midst of a major global crisis. The last one was Dr Jalan, who took charge in October 1997, just as the Asian crisis was unfolding, and my sense has always been that his baptism by fire engendered in him an excessive fear of volatility.
It remains to be seen whether — and how — Dr Subbarao’s similar baptism affects his approach.
So far, of course, he seems to have settled right up front and centre. His monetary policy statement was very forthright in listing the challenges facing RBI — (1) ensuring the balance between liquidity for growth and the inflationary threat, (2) managing the government’s huge borrowing programme, (3) rejuvenating private investment demand, (4) pushing for fiscal consolidation — back to FRBM, and (5) moving ahead with deregulation to widen and deepen financial markets.
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It was most significant that he put inflation management first, acknowledging that despite the fact that the WPI is negative year-on-year, wholesale prices have actually been rising in recent months, and are up 3.5 per cent since the start of 2009. I think it is critical that he has started establishing his hawkishness on inflation early.
The domestic yield curve had been steepening rather sharply, responding, no doubt, to the huge fiscal boost that had been poured into both the domestic and global markets since the start of the crisis. By a what-could-be-frightening coincidence, the steepening began almost to the day Dr Subbarao took office. Perhaps, this — the fear of a steepening yield curve — will be the determining parameter of his term in office.
As of this writing, however, a week since his monetary policy statement, the yield curve does appear to be steadying, with the difference between the 10-year and one-year yields down 35 basis points from its peak and 15 basis points since the monetary policy. It would seem that the market is showing him some respect — or, at least, giving him a chance.
Of course, the curve (and Dr Subbarao) will remain under pressure, particularly as strong corporate results could get the market back to believing that we are embarking on another bull round. He will need to keep sweet-talking the market in the weeks to come, something he had probably envisaged when, just before this last monetary policy, he had said he believed it was important to increase the transparency of communication between the RBI and the market.
Again, Dr Subbarao showed his pragmatism by not getting drawn into the ongoing controversy about the setting up of an independent Debt Management Office. There are many who believe that separating out this function would eliminate the potential conflict of interest between raising funds for the government at the lowest possible rate and keeping inflation in tight check. But, as has become apparent during the ongoing crisis in global financial markets, the truth is that one size doesn’t fit all, and that central banking, more perhaps than other enterprises, is really as much — if not more — art as science. There is no room for doctrinaire approaches.
Or, like my mother used to — and still — tell(s) me, “Be practical, beta.”
Still to be seen, of course, is our surfer’s approach to deregulation. The immediately previous team did a stellar job in getting India’s forex market closer to global standards — a recent research paper we published showed that the Indian forex market ranked first of 14 emerging markets studied.
It is time now to dramatically deregulate the bond market.
Nothing new there — every RBI Governor has talked and talked about a deep and liquid money market. But a real yield curve remains painfully elusive. Hopefully, the second launch of interest rate futures will provide a start.
To my mind, this — creating a real yield curve — is Dr Subbarao’s main task, and, as long as he keeps the market on side, it looks eminently doable.