The Reserve Bank of India (RBI) has set the clock back on transparency in its operations, something it has assiduously cultivated in the last few years. The monetary and credit policy for the first half of 2000-2001 is glaring in its doublespeak in at least two places.
First of all, the whole issue of drought. Top central bank officials have been concerned with the emerging drought situation for quite some time. Reactions range from outright concern over the price situation, especially in oilseeds and pulses but tempered off and on with the government's apparent promise to hold the price line through imports. A less vocal, and perhaps minority view is that the drought follows from the less than favourable winter rains, and therefore the headline grabbing news is just a media hype. But officials' stated position is very often at odds with their personal opinion.
What however is glaring is that the monetary and credit policy begins with the assumption of real gross domestic product (GDP) growth of 6.5 per cent to 7 per cent in 2000-01, "assuming a normal agricultural crop (para 31)." Officials have diligently explained that the key assumption is a 9 per cent growth in the services sector and a 1.9 per cent growth in agriculture. There is something wrong somewhere: an official policy document painting a rosy picture when its officials fear the worst?
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Either the RBI is not being fully truthful on its projections, in agricultural growth and broadly in GDP growth, or it is looking for an obvious, non-controversial peg in drought on which to hang some uncomfortable monetary measures later in the year, "if the situation so demands." Any unbiased observer looking ahead at a projection of 6.5 to 7 per cent growth in 2000-01, as against 5 per cent, 6.8 per cent and 5.9 per cent in the last three years would assume that the economy is cruising on a reasonably comfortable growth path.
The second instance of double speak is in its view on liquidity and interest rates. It may be recalled the RBI has weaned the marked into complacency over the last two years with its constant refrain that it "will ensure that liquidity remains comfortable at all times." In very simple terms, this is saying that interest rates will be kept at current levels if not forced down. Indeed, in the annual reports in the last two years and in various other forums, the central bank has taken credit for managing to push interest rates lower by "an active debt management through open market operations, private placements, repos and reverse repos." The RBI has backed up its pronouncements on easy liquidity with its actions, the latest being the package of rate cuts on April 1.
Suddenly, there is about turn in this policy, with dire warnings to the banking sector that things might change very suddenly and that "banks and financial institutions should make adequate allowances for unforeseen contingencies in their business operational plans, and take into account the implications of changes in the monetary and external environment on their operations" (para 32).
Two questions arise. Firstly, do banks need to be told to plan with exigencies in mind or is it the normal part of any rational agent's planning exercise? Secondly, if this suggestion is a redundancy, is there an implicit acknowledgement that the RBI has falsely led everyone up the garden path into assuring that it will do what best it can to see lower interest rates?
Market sources say this is not the first time that the RBI has drawn attention to the fiscal imbalances, nor is it going to be the last time. Rather than have markets work their way out of the mess of huge market borrowings in the last two years, the RBI actually acted in concert by using the private placement route to create a buffer between the government and the markets.
While it is undoubtedly true that the central bank used the best possible tools at that time to drive the system into a long-term path, the fact still remains that it has delayed some inevitable corrections in the system. In fact, it forced the markets to look the other way all the time.
What then could justify the about turn? The RBI has been pretty emphatic in the credit policy that it can no longer stand guarantee for anything. Examples abound. In the context of changing policy, the policy says, "If the economy were characterised by excess demand and liquidity pressures, it would have been difficult to meet the large borrowing requirements of government without a sharp increase in interest rates and some crowding out of private investments. Under those circumstances, the economy could have slipped into a vicious circle of tight liquidity and high interest rates. It is of utmost importance that such an eventuality is avoided by taking credible fiscal action urgently (para 14)."
At other places, it notes that banks are holding government paper in excess of their statutory requirements. "The banking system now holds government securities of around 34.3 per cent of its net demand and time liabilities as against a minimum statutory requirement of 25 per cent. In terms of volume, the holdings above the statutory liquidity ratio (SLR) amounted to about Rs 85,000 crore, which is higher than the last year's net borrowings (para 13)," and the context here to the declining appetite for government paper.
This begs a simple question: wasn't it equally true last year and the year before that? But instead of letting the lack of appetite lead to failed auctions, the RBI went ahead with inducements to get the auctions through. In fact, the RBI notes that the moderation in money supply growth was largely due to the fall in RBI credit to government, because not many auctions of dated government paper devolved on the central bank. "The relatively low growth of M3 of 13.6 per cent (as compared with 19.2 per cent last year) was possible because of a lower expansion in reserve money. Particularly significant was the decline in the monetised deficit of the government which contributed to this favourable outcome. It is interesting to note that if the reserve money growth and monetised deficit were of the same order in 1999-2000 as in the previous year, on the basis of the normal relationship among these variables, M3 expansion could have actually been even higher than last year, which would have had an unfavourable effect on the inflationary outlook for the current year", the policy says in para 11.
On a macro level, another instance is its concern with the falling savings rate with is again true in the last three years. Basically, theory suggests that the investment rate is equal to the sum of the domestic savings rate and the current account deficit (equivalent of foreign resources bring drawn down). The savings rate has been falling in the last three years and so also the current account deficit.
Broadly, nothing has changed in the last three years except that the problem has become much more pressing. No one can bet whether the system will break this year. But what is questionable is the RBI's rummaging for all sorts of explanations _drought, a macro savings rate and all _ to justify a late correction. That's where doublespeak hurts. As the cliche goes, you can't be serving God and Mammon at the same time.