That the RBI does not have a rigid "model" of economic management should be clear to even the most casual observer. It seems to pick and choose the approach that seems appropriate for the moment and is fairly nimble when it comes to switching tracks.
Its occasional claim to policy consistency does not seem to be borne out by its actions. Take the currency market, where its stated policy is that it does not have an exchange rate target. It claims to be content to let the play of market forces determine the exchange rate. It apparently intervenes in this market (buy or sell dollars) only to prevent excess volatility. This should mean (unless one is splitting hairs on the exact definition of volatility) that it should step in when there are sharp moves in the exchange rate.
Its recent record in managing the foreign exchange market clearly runs contrary to this. The central bank has been a large buyer of dollars when the rupee has tended to appreciate beyond certain levels and has accumulated large dollar reserves in the process. There is no free play of market forces there. It has also allowed the rupee to depreciate by about 6 per cent over the last couple of weeks. That should qualify, going by any yardstick, as a move that's sharp enough.
I do not mean to be critical of this flexible approach. There is no virtue in having a rigid operating framework, especially when it comes to managing an emerging economy. The RBI's choice of operating model does reveal, however, the bank's assessment of the economic situation at that point in time and its assumptions about the set of instruments that work best in addressing them. It is these assumptions and assessment that one could have a bone to pick with.
What do its current policy stance and recent policy moves tell us? It appears to me that it is far more concerned about growth, which it has chosen to communicate through its policy statement. While its official forecasts for GDP growth are 8-8.5 per cent, it perhaps believes that there are risks to the downside. It then appears to make another vital assumption
