John Maynard Keynes had famously hit back at critics who accused him of altering his opinions too often. “When the facts change, I change my mind. What do you do, sir?” he had asked one of them.
Illustration: Jayachandran / Mint
Central bankers have to keep reassessing the situation, especially in volatile times such as these. Reserve Bank of India (RBI) governor D. Subbarao used a milder version of Keynes’ argument in his first statement to the press, on 9 September. “We will be monitoring the situation closely and continuously…and take action as appropriate,” he said, to explain whether monetary policy will be tightened further. And he has now acted.
The facts have just changed. RBI announced a slew of measures on Tuesday in response to the global market turmoil. They will effectively help ease liquidity in the domestic market, a change from the central bank’s recent hawkishness.
The fact that RBI has moved so suddenly shows that there are worries about the damage that the global financial crisis can bring upon our own markets. This move follows what several other central banks have done. China has cut interest rates to support economic growth this week. Taiwan has reduced its reserve ratios on Tuesday. The central banks of Australia and New Zealand did so last month. These two are not large economies, but their central banks are known to be inflation hawks. The US Fed was due to meet to decide its policy at the time this editorial was written.
The worldwide tumble in stock markets has not been good news for Indian investors. But the fact that commodity prices — especially crude oil — have tumbled in tandem may prove to be good news for the Indian economy as a whole. Oil is now trading in double digits, far lower than its recent peak of $147 per barrel.
The only question is whether the facts have changed enough for RBI to hit the pause button on rate hikes. The central bank has been worried about high inflation — and rightly so. High inflation destroys growth in the long run, as it forces a central bank to take stronger action to bring it under control later. Inflation in India is still way too high, though it could already have peaked. Meanwhile, the weakness in the rupee — which is now at 46.93 to a dollar — is another reason why it may be tough to cut interest rates.
Subbarao will undoubtedly read the tea leaves with care in the run-up to his first monetary policy next month. A rate cut seems unlikely. But there is a growing case for him to pause, and make the next change in interest rates in 2009.
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