Rajeev Malik: Give the RBI some credit

Central banks generally have a thankless job. Among other things, they have to work behind the scenes, deal with politicians who may not share "" or fully understand "" the concerns of the central bank, and communicate effectively with both investors and public. Also, unlike politicians, central bank officials are not elected, have little personal interest in being visible in the same self-serving way that we have come to identify with politicians, and prefer to avoid comments on the level or direction of asset prices. But central banks have to always look out for risks, and design policy accordingly.

The bottom line is that because almost all their actions are shrouded in mystery, central banks almost never get any credit for their sound policies that enhance economic resilience, but get criticised for several things.

It is amazing that in the flood of commentaries following the recent sharp correction in Indian equity prices, no one has said that it was one of the risks that the Reserve Bank of India (RBI) has been concerned about. The best financial experts will inform you that it is almost a mug's game to forecast the exact date when an event risk will begin to unfold, and how long it'll last. A central bank is best viewed as a risk manager working with probabilities of different outcomes. Many times, several indicators used collectively offer a fairly reliable assessment about whether the probability of a particular event risk is increasing or decreasing, though, admittedly, even then the actual outbreak of the risk could defy expectations.

For some time now, the RBI has been hinting that it is concerned about the increasing dependence on potentially volatile capital inflows, especially at a time when the economy is posting record-high current account deficits. But most market players have chosen to ignore those hints. The central bank's concern should be understandable, even to politicians: a sudden reversal in capital inflows could leave the exchange rate vulnerable, and warrant an adjustment in the currency that may not be preferred.

It is probably fair to say that the RBI did not know what would trigger the selling of equities by foreign investors. But for all practical purposes, the actual trigger is less important than ensuring that policy is incorporating tackling the aftershocks. To that effect, its intervention in the foreign exchange market to prevent undue appreciation of the exchange rate owing to strong portfolio inflows has been on track. One only needs to check the hit to the Turkish Lira and some Latin American currencies to see how much uglier the recent sting from higher global risk aversion could have been.

Whatever the merits of criticising the RBI for too much intervention in the forex market, its recent actions have been vindicated by limited reaction of INR to the sudden selling by foreign investors. The Indian rupee will likely be under pressure to weaken further, and investors should ignore the currency risk at their peril. However, the RBI will probably not get any credit for a job well done.

Rajeev Malik is vice president and senior economist with JPMorgan Chase Bank in Singapore. The views expressed here are personal.