Mumbai: First, C. Rangarajan, chairman of the Prime Minister’s economic advisory council (EAC), said on 20 December that the Reserve Bank of India (RBI) could raise banks’ cash reserve ratio (CRR), or the portion of deposits banks are required to keep with the central bank, from 5% after December.
That sparked a surge in the yield on the benchmark 10-year bond to more than a month’s high to 7.75% the next day. Then the ticker sprang to life again as finance secretary Ashok Chawla said monetary policy steps couldn’t address food price inflation—the yield dropped marginally.
A day later, on 22 December, when Planning Commission deputy chairman Montek Singh Ahluwalia said that monetary policy was not a solution for containing rising food prices, bond dealers were convinced that the central bank would not raise interest rates before the January policy. Bond yields swung again, snapping losses, and rose for four straight days.
No wonder bond dealers, more habituated to trading on subtle signals from central bank officials, are wearying of the government’s broad-brush strokes that are now being picked up by television channels, besides the traditional wire services.
The bond traders, seemingly beleaguered by too much news and the resultant volatility in the market, now want RBI to tell the government to observe some restraint and “filter” comments on interest rates and liquidity, which have a bearing on the bond market.
The topic has repeatedly come up for discussion at all recent meetings that the bond dealers have been holding with the central bank, which will announce its quarterly review of monetary policy on 29 January.
“(The) problem is, people who are informed and can give a view are not commenting,” said a bond dealer, referring to RBI officials. He has attended most of the recent meetings where the issue was discussed, but declined to be identified because of the sensitivity of the issue.
Officials from the finance ministry, Planning Commission and the Prime Minister’s EAC frequently air their views in the media about the efficacy of RBI’s policies in containing inflation or growth. RBI officials normally refrain from making any comments on such issues except from the platform of the quarterly monetary policy review.
Still, the central bank, too, has become less reticent of late. Two RBI deputy governors—Subir Gokarn and Shyamala Gopinath—have commented recently that economic recovery has been uneven and that the focus of monetary policy was shifting to managing recovery and containing inflation from fostering growth after the global downturn.
Another deputy governor, K.C. Chakrabarty, also commented recently that there would be no action before the January policy review.
However, RBI officials don’t make explicit comments about monetary policy in the manner of the finance ministry.
“This causes some concern about the autonomy of RBI,” said K. Kanagasabapathy, director of EPW Research Foundation and a former central banker. “It’s not that RBI does not comment on monetary policy, but government does it more explicitly. It is a source of interference.”
Theoretically, the finance ministry is in charge of fiscal policy while RBI manages the monetary policy.
The RBI governor and the four deputy governors are appointed by the government and “the Central government may, from time to time, give such directions to the bank as it may, after consultation with the governor of the bank, consider necessary in the public interest”, according to the Reserve Bank of India Act, 1934.
The ministry and RBI have their differences on many issues, but officially they always play down any divisions. The central bank enjoys autonomy, but is answerable to Parliament.
“In no other country (does) the finance ministry make statements on what the central bank should do as frequently as we see here,” said another dealer, who also did not want to be named.
According to him, RBI gives a patient hearing to bond dealers’ woes, but maintains silence on “multiple commentators”. “These comments are taken very seriously by the bond traders. The comments, especially before the policy, have a direct bearing on bond movement,” he pointed out.
Media shares the blame
Bond dealers also blame the media for nagging finance ministry officials to speak on monetary policy issues.
If the media doesn’t ask questions about monetary policy to people who handle fiscal policy, they would not comment, they say.
However, media representatives are not ready to buy this argument. “The press is still free in this country, isn’t it?” asked Kalyan Ram, executive editor of Newswire18, a domestic wire agency.
“More seriously, as journalists it’s our job to ask relevant questions to relevant people. The media is responsible and it talks to senior officials of the government who offer inputs into monetary policy formulation. There is nothing wrong with this,” Ram said. “It is up to the market to decide what weight it gives to government officials speaking on matters relating to RBI. The media is just a conduit... It is not for us to decide about RBI-government sensitivities.”
Rangarajan, himself a former central bank chief, said at a recent banking conference in Mumbai that given the inflationary pressure, RBI may absorb some excess cash from the banking system.
Speculation that CRR would be raised led the 10-year bond to its biggest weekly loss in a month in the second week of January.
While finance secretary Chawla has recently been quoted as saying it is up to RBI to decide on the rates on 29 January, he has earlier been cited frequently on monetary policy issues.
RBI governor D. Subbarao had on 9 December said that India may need to use monetary policy to stabilize inflationary expectations if food prices continue to gain “for a long time”.
On 14 December, Chawla said there was no need for emergency rate action although the government was concerned that inflation was quickening.
Even as the markets, including bankers and economists, widely perceive that there will be a hike in CRR this time, Ahluwalia’s comment that inflation is fuelled by supply-side factors and excess cash in the system isn’t the cause, has fuelled speculation that RBI could stay away from tightening liquidity.
According to bond dealers, the finance ministry has every right to comment on policy issues, but the ministry officials should exercise restraint while making such comments. With RBI, the organization responsible for framing monetary policy, neither supporting nor denying the views, there is uncertainty in the bond market, already feeling the burden of the government’s record Rs4.51 trillion borrowing programme.
The 10-year benchmark bond yield, which was 4.86% a year ago, has crossed 7.6% and is expected to touch 8% by March.
RBI has reduced interest rates six times between October 2008 and April 2009 and slashed CRR by 4 percentage points between October 2008 and January last year.