A computer engineer, Malhotra’s choice of words and style of communication, rather uncharacteristic of central bankers, sometimes betrays an element of binary signalling: at the April policy, he had spelt out in no uncertain terms that the next policy would see either a pause or a cut — a promise he more than kept; by changing the policy stance back to ‘neutral’ on Monday, he gave a broad hint that there would be no cuts in the next policy, and probably in the one after that.
After the April rate cut, Malhotra had said (in as words) that the RBI had to act as the government had done its bit (as inflation had started softening). On Monday, he was unequivocal that he had played his part and it’s now the turn of others.
In the past few weeks, select commentators and columnists had drummed up the need for a sharp rate cut, lest a robust growth in the last quarter slows down Mint Street. No one, however, expected Malhotra to slash the benchmark rate by half a point as well as reduce CRR (the slice of customer deposits banks keep as cash with RBI) by 100 basis points in phases — though the CRR reduction could be partly aimed to help banks regain some of what it would lose from lower rates.
Different Times?
It is meant as a shock and awe strategy to shake banks out of their apparent slumber, and force them to lower rates to levels that finally attract borrowers. Only a governor who doesn’t carry the burden and hesitance of an economist, is relatively unfazed by the dialectics of monetary policy, and is ready to disregard the traditions of central banking — where the river is crossed by feeling the stones — would do this.
Malhotra is likely to have felt that the customary quarter point cut would not be a strong enough push to nudge banks. His strategy may (or, may not) work, but few central banks would sharply slash rates and a key reserve ratio simultaneously unless there is a meltdown or pandemic.
Monetary policy works with long and uncertain lags, and most central banks would refrain from front-loading strong measures — particularly, when the macro economic situation is nowhere close to a crisis that warrants such a stimulus. Typically, a central bank would not lower the rate at one go just because there is room for it. Also, rarely if ever the last cut before a long, conscious pause is as deep as 50 basis point.
Perhaps, these are different times. The RBI could be also hinting that the CRR cut is not ‘cyclical’, but a ‘structural’ one: with rules like ‘liquidity coverage ratio’ (that requires banks to hold enough liquid assets) in place, a 3% CRR (down from 4) is good enough. And, is the robust rate cut and liquidity boost trying to achieve more than a `cyclical recovery’ and raise the ‘potential growth’? We will find out.
Malhotra has placed a bet that central bankers would seldom take due to fears that cheaper money and fresh liquidity could chase unproductive and speculative assets: dismal returns on fixed deposits make equities more tempting. But the Guv doesn’t have such inhibitions. He said, “We don’t believe in only making statements. We believe in action” — a curious claim for central bankers who usually play around with words long before they act.
Content Source: economictimes.indiatimes.com