Do RBI governors mean what they say? Or say what they mean? An attempt to dissect Governorspeak and action. | |
| The market is divided over the latest monetary policy review, some say it was dovish, others insist it was hawkish. RBI Governor Reddy spoke of using all possible measures this time around while, in July, he spoke of appropriate measures. Don't all possible measures include appropriate measures? In the past, while using the same language, governors have come up with totally different actions. A look at some policies makes this clear. |
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| April 2001's policy stance: Provision of adequate liquidity to meet credit growth and support revival of investment demand. To continue (with) the present stable interest rate environment. Action: No change in rates. |
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| October 2001's policy stance Provision of adequate liquidity to meet credit growth To continue (with) the present stable interest rate environment... Action: Bank rate cut 50 basis points. No change in stance, but different actions. |
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| April 2003's policy stance: Provision of adequate liquidity to meet credit growth and support investment demand... To continue with the present stance of preference for a soft and flexible interest rate environment within the framework of macroeconomics stability. Action: Bank rate was reduced to 6 per cent. A new word flexible is inserted in the stance. But does this justify the rate cut? |
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| October 2003's policy: Provision of adequate liquidity to meet credit growth...with a preference for soft and flexible interest rate environment. Action: no rate cut or hike. |
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| April 2004's policy stance: Provision of adequate liquidity to meet credit growth and support investment and export demand in the economy... While continuing with the status quo, to pursue an interest rate environment that is conducive to maintaining the momentum of growth. Action: Status quo maintained. Reference to soft and flexible interest rate is dropped. It also talks about meeting export demand in addition to investment demand. |
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| October 2004's policy stance: Provision of "appropriate" liquidity to meet credit growth... while placing equal emphasis on price stability. To pursue an interest rate environment that is conducive to macroeconomic and price stability... |
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| Action: Reverse repo rate raised by 25 basis points to 4.75 per cent. It drops the first hint of change in the interest rate cycle. A new word appropriate replaces adequate to signify the change in the central bank's approach towards liquidity. |
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| January 2006's policy stance: To maintain the emphasis on price stability with a view to anchoring inflationary expectations. To continue to support export and investment demand To provide appropriate liquidity to meet genuine credit needs of the economy with due emphasis on quality. To consider responses as appropriate to evolving circumstances. Action: Reverse repo rate hiked by a quarter percentage point to 5.50 per cent. Repo rate too went up to 6.50 per cent. No visible change in the stance but tightening of the policy continues. |
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| April 2006's policy stance: To ensure a monetary and interest rate environment that enables continuation of the growth momentum ....while being in readiness to act in a timely and prompt manner on any signs of evolving circumstances impinging on inflation expectations. To focus on credit quality and financial market conditions... To respond swiftly to evolving global developments. Action: No change in repo, reverse rate or bank rate. RBI is ready to respond "swiftly" to the evolving circumstances but refrains from hiking the rates. In fact, it does this in June 2006, a month ahead of the quarterly review. |
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| July 2006's policy stance: To ensure a monetary and interest rate environment that enables continuation of the growth momentum... To reinforce the focus on credit quality and financial market conditions... To consider measures as appropriate to the evolving global and domestic circumstances impinging on inflation expectations and the growth momentum. Action: Reverse repo and repo rate hiked by a quarter percentage point each to 6 per cent and 7 per cent, respectively.In April it promised to respond swiftly but kept the rate unchanged. It was hiked in June and again in July even though there is no visible change in the stance. |
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| To sum up, the RBI itself seems to be the best interpreter of its policy! Indeed there are subtle changes in its language each time, but the same stance of the policy can be used to defend its action (read rate hike) or inaction (no hike) with equal ease. |
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