The central banker’s job is not the easiest one in modern times. He is not a politician out to win elections, nor a dry economist who can offer theories for solace. He is a solitary statesman whose ifs and buts weigh heavily on the economy, and one who must take practical decisions keeping in mind the complex forces of globalisation, the underlying principles of market economics and, in the case of India, an inspired view of the needs of a developing democracy fast becoming a hot emerging economy. Yaga Venugopal Reddy’s credit policy statement on Tuesday reveals both the constraints he is facing and the wisdom he must display in balancing a complex play of interests.
Mr Reddy was batting for his country’s economy a day ahead of a meeting of the US Federal Reserve mulling its second interest rate cut in a month, but had the difficult choice of walking a tightrope between sustaining a handsome economic growth and a hidden undercurrent of inflation. The powers-that-be in New Delhi have chosen in their wisdom not to pass on the effects of global oil prices to the State-controlled price regime. With inflation officially under 4 per cent but actually hiding some warts, it was natural for Mr Reddy to do precisely nothing. This is difficult, because industry has been crying out for interest rate cuts even as there has been a slowdown in key manufacturing industries. By not responding to a US rate cut, the Reserve Bank of India (RBI) has potentially opened the gates for foreign capital inflows to increase into India because money flows from low-interest nations to high-interest regimes in a globalised world. Finance Minister P. Chidambaram and Mr Reddy now have to grapple with the prospect of the rupee appreciating further against the US dollar as a result of these inflows, which in turn could hit export competitiveness or domestic industry in the form of competition from cheap imports.
All that the RBI has done is to ensure that enough liquidity is available for borrowers to fuel domestic industrial growth, while being confident that overall GDP would sustain. In addition, the central bank has assured steps to ensure credit for employment-intensive sectors, reminding us that socialist impulses remain in the system embracing globalisation. And why not? The US House of Representatives has just passed a $ 147 billion fiscal package to ward off a US recession, while even that old conservative institution, the IMF is suggesting fiscal spending by various governments to boost growth. In such a context, Mr Reddy’s do-nothing policy is loaded with wisdom. The key point is that he can watch the global winds and cut interest rates at a later date. Keeping an ace or two up one’s sleeves is always a good thing for a central bank governor.